<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 1, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
IMPERIAL CREDIT COMMERCIAL
MORTGAGE INVESTMENT CORP.
(Exact name of registrant as specified in its governing instrument)
C/O IMPERIAL CREDIT INDUSTRIES, INC.
23550 HAWTHORNE BOULEVARD, BLDG ONE, SUITE 110
TORRANCE, CALIFORNIA 90505
(Address of principal executive offices)
--------------
MARK S. KARLAN
C/O IMPERIAL CREDIT INDUSTRIES, INC.
23550 HAWTHORNE BOULEVARD, BLDG ONE, SUITE 110
TORRANCE, CALIFORNIA 90505
(Name and address of agent for service)
--------------
COPIES TO:
J. A. SHAFRAN, ESQ. GEORGE C. HOWELL, III, ESQ.
SONNENSCHEIN NATH & ROSENTHAL HUNTON & WILLIAMS
601 SOUTH FIGUEROA STREET, SUITE 1500 RIVERFRONT PLAZA, EAST TOWER
LOS ANGELES, CALIFORNIA 90017 951 EAST BYRD STREET
TELEPHONE: (213) 623-9300 RICHMOND, VIRGINIA 23219
FACSIMILE: (213) 623-9964 TELEPHONE: (804) 788-8200
FACSIMILE: (804) 788-8218
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF CLASS AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
OF SECURITIES BEING REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE(3)
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<S> <C> <C> <C> <C>
Common Stock, par value
.0001 per share.............. 23,000,000 $15.00 $345,000,000 $104,545.45
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</TABLE>
(1) Includes 3,000,000 shares that are issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The filing fee has been computed in accordance with Rule 457(a).
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED AUGUST 1, 1997
20,000,000 SHARES
[LOGO OF IMPERIAL CREDIT COMMERCIAL
MORTGAGE INVESTMENT CORP.]
COMMON STOCK
----------
Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC" and together
with its subsidiaries, the "Company") is a newly organized Maryland
corporation. ICCMIC will elect to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended. Imperial Credit
Asset Management Corporation (the "Manager"), a wholly-owned subsidiary of
Imperial Credit Industries, Inc. ("Imperial Credit"), will manage the day-to-
day operations of the Company, subject to the supervision of ICCMIC's Board of
Directors.
Of the shares offered hereby, 1,980,000 shares will be sold to Imperial
Credit at the initial public offering price net of any underwriting discounts
or commissions. After such sale Imperial Credit will own 9.9% of the Common
Stock of ICCMIC, assuming that the Underwriters do not exercise their over-
allotment option.
The initial public offering price of the Common Stock is expected to be $15
per share. Prior to this offering, there has been no market for the Common
Stock. The initial public offering price has been determined by negotiation
between the Company and the Underwriters. See "Underwriting." The Company will
apply for inclusion of the Common Stock in the Nasdaq National Market under the
symbol "ICMI."
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK INCLUDING, AMONG OTHERS:
. The Company intends to invest in non-investment grade mortgage-backed
securities, which are sensitive to events of loss, such as credit losses
due to borrower default, casualty losses and state law enforceability
issues;
. The Company's investments will be sensitive to changes in prevailing
interest rates and rates of prepayment;
. The Company may invest in distressed real estate, which may not generate
sufficient revenues to meet operating expenses and debt service
obligations;
. The Company intends to leverage its investments, which could lead to
reduced or negative cash flow and reduced liquidity;
. Not all of the Company's investments have been identified;
. Certain officers and directors of the Company are officers and directors
of Imperial Credit and its affiliates, which are expected to sell assets
to the Company;
. The Company will be taxed as a corporation if it fails to qualify as a
REIT;
. In order to qualify as a REIT, the Company must satisfy certain
requirements relating to its assets and income, which may restrict the
Company's ability to invest in various types of assets; and
. In order to maintain REIT status, the Company must distribute at least 95%
of its taxable income each year, which could result in the Company needing
to sell assets, borrow money or raise capital in order to satisfy this
distribution requirement.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share . . . . . . . . . . . . . . . . . . . . . . $ $ $
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Total(3)(4).. . . . . . . . . . . . . . . . . . . . . $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses in connection with the Offering, estimated at
$ , which will be payable by the Company.
(3) The Company has granted the several Underwriters a 30-day option to
purchase up to 3,000,000 additional shares of Common Stock to cover over-
allotments. If all such shares of Common Stock are purchased, the total
Price to Public, Underwriting Discount and Proceeds to Company, before
expenses of this Offering, will be $ , $ and $ , respectively. See
"Underwriting."
(4) The total Price to Public and the total Proceeds to Company include the
proceeds of the sale of up to 2,180,000 shares of Common Stock to Imperial
Credit and directors, officers and employees of either the Company or the
Manager and members of their respective families net of the Underwriting
Discount.
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Common Stock will be made in New York,
New York on or about , 1997.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC. JEFFERIES & COMPANY, INC.
The date of this Prospectus is , 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
----------------
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.................. 4
ORGANIZATION AND RELATIONSHIPS...... 12
RISK FACTORS........................ 13
Risks Related to Investments in
Mortgage Loans.................... 13
Greater Risks of Loss From
Multifamily and Commercial
Loans............................ 13
Greater Risk of Loss from Limited
Recourse Loans................... 13
Volatility of Values of Mortgaged
Properties....................... 13
Greater Risks of Loss From
Construction and Mezzanine
Loans............................ 14
Default Risks Associated with
Distressed Mortgage Loans........ 14
Geographic Concentration in
California....................... 14
Delinquency and Loss Ratios May Be
Affected by Performance of Third-
Party Servicers.................. 14
One Action Considerations......... 15
Risks Related to Investments in MBS
Interests......................... 15
Credit Risks of Subordinated MBS
Interests........................ 15
Prepayment and Interest Rate Risks
Related to Subordinated MBS
Interests, IOs and POs........... 15
REMIC Residual Interests and Other
MBS Interests May Generate
Taxable Income in Excess of Cash
Received......................... 16
Risks Related to Investments in
Real Property..................... 16
Value of Real Property Dependent
on Conditions Beyond Company's
Control.......................... 16
The Company's Insurance Will Not
Cover All Losses................. 17
Property Taxes Decrease Returns on
Real Estate...................... 17
Compliance with Americans with
Disabilities Act and Other
Changes in Governmental Rules and
Regulations May Be Costly........ 17
Properties with Hidden
Environmental Problems May
Increase Costs and Create
Liabilities for the Company...... 17
Real Properties with Known
Environmental Problems May Create
Liability for the Company........ 18
Foreign Real Properties are
Subject to Currency Conversion
Risks, Foreign Tax Laws and
Uncertainty of Foreign Laws...... 18
Economic and Business Risks........ 18
Interest Rate Changes May
Adversely Affect the Company's
Investments...................... 18
Risks Associated with Hedging
Strategies....................... 19
Leverage Can Reduce Income
Available for Distribution....... 19
The Company May Not Be Able to
Borrow Money on Favorable Terms.. 20
Adverse Changes in General
Economic Conditions Can Adversely
Affect the Company's Business.... 20
</TABLE>
<TABLE>
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PAGE
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<S> <C>
Potential Interest Rate Mismatch
between Asset Yields and
Borrowing Rates.................. 20
Potential Inability to Acquire
Assets at Favorable Spreads
Relative to Borrowing Costs;
Competition and Supply........... 20
Appropriate Investments May Not Be
Available and Full Investment of
Net Proceeds May Be Delayed...... 21
Investments May Be Illiquid and
Their Value May Decrease......... 21
Legal and Tax Risks................ 21
Tax Risks......................... 21
Plans Should Consider ERISA Risks
of Investing in Common Stock..... 23
Ownership Limitation May Restrict
Business Combination
Opportunities.................... 23
Preferred Stock May Prevent Change
in Control....................... 23
Maryland Anti-Takeover Statutes
May Restrict Business Combination
Opportunities.................... 23
Board of Directors May Change
Certain Policies Without
Stockholder Consent.............. 23
Loss of Investment Company Act
Exemption Would Affect the
Company Adversely................ 23
Limitation on Liability of Manager
and Officers and Directors of the
Company.......................... 24
Other Risks........................ 24
Conflicts of Interest in the
Business of the Company.......... 24
External Management of the
Company.......................... 27
Regulation of Manager's
Affiliates....................... 27
Newly Organized Corporation....... 28
Risk that Market for Common Stock
Will Not Develop................. 28
Possible Changes in Price of
Common Stock Due to Changes in
Yields........................... 28
Future Offerings of Capital
Stock............................ 28
OPERATING POLICIES AND OBJECTIVES... 29
Strategy........................... 29
Imperial Credit's Experience....... 30
General........................... 30
Multifamily and Commercial
Mortgage Lending................. 30
Franchise Lending................. 30
Business Finance and Consumer
Lending.......................... 31
Advisory, Investment and Other
Activities....................... 31
International Experience.......... 32
Recent Structured Finance
Transactions..................... 32
The Company's Assets............... 33
Mortgage Loans for
Securitization................... 33
Distressed Mortgage Loans......... 34
Construction Financing and Loans
Subject to Prior Liens........... 34
MBS Interests..................... 34
</TABLE>
2
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<TABLE>
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PAGE
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<S> <C>
Commercial Mortgage-Backed
Securities....................... 38
Residential Mortgage-Backed
Securities....................... 38
Multifamily and Commercial Real
Properties....................... 39
Foreign Real Properties........... 40
Sale-Leaseback Transactions....... 40
Portfolio Management............... 41
Leverage and Borrowing............ 41
CMOs and Warehouse Lines of
Credit........................... 41
Reverse Repurchase Agreements..... 41
Bank Credit Facilities............ 42
Mortgage Loans on Real Property
Owned by the Company............. 42
Interest Rate Management
Techniques....................... 42
Hedging........................... 42
MANAGEMENT OF OPERATIONS............ 43
Imperial Credit Industries, Inc.... 43
The Manager........................ 43
The Management Agreement........... 45
Management Fees.................... 46
Costs and Expenses................. 47
Stock Options...................... 47
Limits of Responsibility........... 48
Certain Relationships; Conflicts of
Interest.......................... 49
THE COMPANY......................... 51
Directors and Executive Officers... 51
DISTRIBUTION POLICY................. 53
YIELD CONSIDERATIONS RELATED TO THE
COMPANY'S INVESTMENTS.............. 53
Mortgage Loans..................... 53
MBS Interests...................... 54
IOs, Inverse IOs and Sub IOs....... 55
POs................................ 56
Real Property...................... 56
INITIAL INVESTMENTS................. 57
General............................ 57
Initial Mortgage Loans............. 57
General........................... 57
Representations and Warranties.... 57
Certain Characteristics of the
Initial Mortgage Loans........... 59
Underwriting Guidelines............ 59
Initial MBS Interests.............. 61
General........................... 61
YIELD CONSIDERATIONS RELATED TO THE
INITIAL MBS INTERESTS ............. 67
General............................ 67
Initial Subordinated Interests..... 67
Modeling Assumptions............... 67
Yield on the Interest Only
Certificates...................... 73
SERVICING OF MORTGAGE LOANS......... 75
SPTLs' Servicing Experience........ 76
Special Servicing ................. 78
Responsibilities of Master
Servicer.......................... 78
Responsibilities of Special
Servicer.......................... 78
CAPITALIZATION...................... 80
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF LIQUIDITY AND CAPITAL
RESOURCES.......................... 80
DESCRIPTION OF CAPITAL STOCK........ 81
General............................ 81
Common Stock....................... 81
Preferred Stock.................... 81
Restrictions on Transfer........... 81
Dividend Reinvestment Plan......... 83
Reports to Stockholders............ 83
Transfer Agent and Registrar....... 83
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF ICCMIC'S CHARTER AND
BYLAWS............................. 84
Board of Directors................. 84
Amendment.......................... 84
</TABLE>
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<S> <C>
Business Combinations.............. 84
Control Share Acquisitions......... 84
Operations......................... 85
Advance Notice of Director
Nominations and New Business...... 85
Possible Anti-Takeover Effect of
Certain Provisions of Maryland Law
and of the Charter and Bylaws..... 85
COMMON STOCK AVAILABLE FOR FUTURE
SALE............................... 86
FEDERAL INCOME TAX CONSIDERATIONS... 87
Taxation of the Company............ 87
Requirements for Qualification..... 88
Income Tests....................... 89
Asset Tests........................ 93
Distribution Requirements.......... 93
Recordkeeping Requirements......... 95
Failure to Qualify................. 95
Taxation of Taxable U.S.
Stockholders...................... 95
Taxation of Stockholders on the
Disposition of the Common Stock... 97
Capital Gains and Losses........... 97
Information Reporting Requirements
and Backup Withholding............ 97
Taxation of Tax-Exempt
Stockholders...................... 97
Taxation of Non-U.S. Stockholders.. 98
State and Local Taxes.............. 100
Sale of the Company's Property..... 100
Investment in Foreign Assets....... 100
Proposed Legislation............... 100
ERISA CONSIDERATIONS................ 102
Employee Benefit Plans, Tax-
Qualified Retirement Plans, and
IRAs.............................. 102
Status of ICCMIC under ERISA....... 103
CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS AND REAL PROPERTY
INVESTMENTS........................ 105
General............................ 105
Types of Mortgage Instruments...... 105
Interests in Real Property......... 105
Leases and Rents................... 106
Condemnation and Insurance......... 106
Foreclosure........................ 106
Ground Lease Risks................. 109
Default Interest and Limitations on
Prepayments....................... 109
Due on Sale and Due on
Encumbrance....................... 109
Subordinate Financing.............. 109
Acceleration on Default............ 110
Certain Laws and Regulations; Types
of Mortgaged Property............. 110
Applicability of Usury Laws........ 110
Bankruptcy Laws.................... 110
Forfeitures in Drug and RICO
Proceedings....................... 111
Environmental Risks................ 112
Americans With Disabilities Act.... 113
Soldiers' and Sailors' Civil Relief
Act of 1940....................... 114
USE OF PROCEEDS..................... 115
UNDERWRITING........................ 116
LEGAL MATTERS....................... 118
EXPERTS............................. 118
ADDITIONAL INFORMATION.............. 118
The Company........................ 118
Imperial Credit.................... 118
GLOSSARY OF TERMS................... 119
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS................. F-1
ANNEX A............................. A-1
ANNEX B............................. B-1
ANNEX C............................. C-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus. Unless otherwise indicated,
the information contained in this Prospectus assumes that (i) the Underwriters'
over-allotment option is not exercised and (ii) the offering price ("Offering
Price") of the Common Stock is $15 per share. Unless the context otherwise
requires, all references in this Prospectus to the (i) "Company" shall mean
Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC") and its
subsidiaries, including Imperial Credit Mortgage Securitization Corp.
("ICMSC"); and (ii) "Common Stock" shall mean ICCMIC's common shares, par value
$.0001 per share. Capitalized terms used but not defined herein shall have the
meanings set forth in the Glossary beginning on page 119.
THE COMPANY
ICCMIC is a Maryland corporation organized on July 31, 1997, which will elect
to be taxed as a REIT under the Code. The Company will be managed and advised
by Imperial Credit Asset Management Corporation, a wholly owned subsidiary of
Imperial Credit Industries, Inc. ("Imperial Credit"). See "Management of
Operations." The Company intends to enhance the value of its Common Stock by
pursuing advantageous investments that capitalize on inefficiencies in the
mortgage and real estate markets. The Company's investments will include
several categories of real estate related assets.
MORTGAGE LOANS AND MBS INTERESTS
The Company intends to invest primarily in performing multifamily and
commercial term loans ("Term Loans") and interests in multifamily and
commercial mortgage backed securities ("CMBS"). The Company intends to invest
in various classes of collateralized mortgage obligations ("CMOs") and pass-
through certificates ("Pass-Through Certificates"), consisting primarily of
non-investment grade classes. The Company's interests in mortgage backed
securities ("MBS Interests") also may include interest only ("IO"), principal
only ("PO"), subordinated interest only ("Sub IO"), and inverse floating
interest only ("Inverse IO") classes.
The Company intends to leverage its assets primarily through the issuance of
CMOs, reverse repurchase agreements, warehouse lines of credit and other
borrowing arrangements, pledging its assets as collateral security for its
repayment obligations. The Company intends to use the proceeds from such
activities to invest in additional Term Loans, MBS Interests and other assets,
and, in turn, to borrow against such assets. The Company's strategy ultimately
is to be leveraged significantly through implementation of the foregoing
process. No assurances can be made, however, that the Company's investment and
leverage strategy can be implemented or will be successful.
OTHER ASSETS
The Company will take an opportunistic approach to its investments and,
accordingly, the Company may invest in assets other than Term Loans and MBS
Interests. The Company may invest in construction (including rehabilitation)
and mezzanine mortgage loans. The Company may invest in multifamily and
commercial mortgage loans that are in default ("Nonperforming Mortgage Loans"),
or for which default is likely or imminent or for which the borrower is
currently making monthly payments in accordance with a forbearance plan
("Subperforming Mortgage Loans" and, together with Nonperforming Mortgage Loans
and other distressed mortgage loans, "Distressed Mortgage Loans"). The Company
may invest in mortgage loans secured by real property located outside the
United States. Term Loans, construction and mezzanine loans, Distressed
Mortgage Loans, foreign mortgage loans and other mortgage loans are referred to
collectively as "Mortgage Loans." The Company also may invest in interests in
residential mortgage backed securities ("RMBS" and, together with CMBS, "MBS").
4
<PAGE>
The Company may invest in multifamily, commercial and other real property
("Real Property"), including properties acquired at foreclosure or by deed-in-
lieu of foreclosure ("REO Property") and other underperforming or otherwise
distressed Real Property (all of such underperforming and distressed Real
Property, together with REO Property, is referred to collectively as
"Distressed Real Property"). In addition, the Company may invest in Real
Property located outside the United States. Mortgage Loans, MBS Interests and
Real Property are referred to collectively as "Real Estate Related Assets." The
Company also may invest in assets marginally related or unrelated to real
estate ("Non Real Estate Assets").
INITIAL INVESTMENTS
In order to invest the net proceeds of the Offering to provide current
returns, the Company expects initially to invest approximately 74% of those net
proceeds in Mortgage Loans and MBS Interests to be acquired from Imperial
Credit and Southern Pacific Thrift & Loan Association ("SPTL"), a subsidiary of
Imperial Credit. See "Initial Investments" on page 57.
RISK FACTORS
An investment in the Common Stock involves various risks, and prospective
investors should consider carefully the matters discussed under "Risk Factors"
beginning on page 13 prior to an investment in the Company. Such risks include,
among others, the following:
. The Company intends to acquire significant amounts of non-investment
grade classes of MBS Interests. These investments are subject to a
greater risk of loss of principal and non-payment of interest than
investments in whole mortgage loans or senior, investment grade
securities.
. Investing in multifamily and commercial loans generally is riskier than
investing in single family residential loans, due to dependency on
successful operation of the underlying properties for repayment,
generally larger loan balances and balloon payments at stated maturity.
. Delinquency and loss ratios on the Company's Mortgage Loans will be
affected by the performance of third-party servicers and special
servicers.
. The geographic concentration of the Company's Mortgage Loans in
California may expose the Company to regional economic fluctuations.
. In periods of declining interest rates, prepayments on Mortgage Loans
and MBS Interests generally increase and the Company likely will have to
reinvest such funds in lower-yielding investments. Conversely, in
periods of rising interest rates, prepayments on Mortgage Loans and MBS
Interests generally decrease and the value of the Company's fixed-rate
investments generally will decline.
. The Company's IOs, Sub IOs, and Inverse IOs will be affected negatively
by faster than anticipated prepayment rates. Particularly high rates of
prepayment could result in a failure of the Company to recover fully its
initial investment in its IOs, Sub IOs, and Inverse IOs.
. The Company's Inverse IOs, which bear interest at floating rates that
vary inversely with changes to a specified index, will be affected
negatively by higher than anticipated levels of the index.
. The Company's POs will be affected negatively by slower than anticipated
prepayment rates, which generally are associated with a rising interest
rate environment.
. Investing in construction and rehabilitation loans generally is riskier
than investing in Term Loans, due to the dependence on successful
completion of a project for repayment, difficulties in estimating
project costs, and loan terms that require little or no amortization of
the loans over their terms, but instead provide for balloon payments at
stated maturity generally tied to anticipated completion of construction
or rehabilitation.
. Investing in mezzanine loans generally is riskier than investing in more
senior mortgage loans because a foreclosure by a senior lienholder may
result in the mezzanine loan becoming unsecured, and the Company may not
recover the full amount, or indeed any, of its investment in such
mezzanine loan.
5
<PAGE>
. The Company's Distressed Real Properties (which may have significant
amounts of unleased space) may not generate sufficient revenues to
provide a return on investment after meeting operating expenses and debt
service obligations. In addition, declining real estate values may
result in losses being charged to earnings.
. Borrower default, casualty losses, and state or foreign law
enforceability issues, as well as other events and circumstances, may
result in losses on the Company's investments.
. Certain of the Company's Real Estate Related Assets may require
significant management resources, may be illiquid, and may decrease in
value because of changes in economic conditions.
. Not all of the Company's assets have been identified.
. The Company intends to use leverage to increase the size of its
portfolio. If borrowing costs increase, or if the cash flow generated by
the Company's assets decrease, the Company's use of leverage will
increase the likelihood that the Company will experience reduced or
negative cash flow.
. The Company's borrowings are likely to include reverse repurchase
agreements with respect to its MBS Interests. A decline in the market
value of those MBS Interests could limit the Company's ability to borrow
or result in lenders initiating margin calls, requiring the Company to
sell assets under adverse market conditions in order to maintain
liquidity. If these sales are made at prices lower than the carrying
value of the assets, the Company will experience losses.
. The Company intends to issue CMOs collateralized by its Mortgage Loans,
retaining the Mortgage Loans subject to the CMO debt. Any losses on such
Mortgage Loans would be borne by the Company.
. The Company's performance may be affected adversely if the Company fails
to hedge effectively against interest rate risks.
. Conflicts of interest between the Company and Imperial Credit or its
affiliates could result in decisions that do not fully reflect the
interests of all of the Company's stockholders.
. The Company will rely on the skill and experience of the Manager's
employees generally, and in particular the Independent Directors will
rely on information provided by the Manager to review transactions of
the Company with Imperial Credit and its affiliates.
. The directors and officers of the Company will have demands on their
time other than those of the Company.
. The Company, with no operating history prior to the completion of the
Offering, will engage in highly competitive businesses.
. The Company may be taxed as a corporation if it fails to qualify as a
REIT.
. In order to qualify as a REIT, the Company must satisfy certain
requirements concerning the nature of its assets and income, which may
restrict the Company's ability to invest in various types of assets.
. In order to maintain REIT status, the Company must distribute at least
95% of its taxable income each year. The Company's proposed investment
in MBS Interests could result in the Company recognizing interest income
(including, but not limited to, original issue discount) for tax
purposes without any corresponding cash distribution, which could result
in the Company needing to sell assets, borrow money or raise capital in
order to satisfy this distribution requirement.
. To maintain its exemption from regulation under the Investment Company
Act of 1940 (the "Investment Company Act"), the Company, among other
things, must maintain certain percentages of its investments in assets
that qualify for exemption from such regulation, which requirement may
restrict the Company's ability to invest in various types of assets.
. Ownership of Common Stock by each stockholder is limited to 9.9% of the
outstanding Common Stock, which may deter third parties from seeking to
control or acquire the Company.
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THE MANAGER
In managing the business and investment affairs of the Company, the Board of
Directors of the Company will be advised by Imperial Credit Asset Management
Corporation (the "Manager"), a California corporation wholly-owned by Imperial
Credit. Imperial Credit is a diversified commercial and consumer finance
company engaged in a variety of lending activities. Imperial Credit conducts
its activities primarily through various subsidiaries and other entities in
which it holds a significant interest, including, among others, SPTL, Franchise
Mortgage Acceptance Company LLC ("FMAC"), Imperial Business Credit, Inc.
("IBC"), Southern Pacific Funding Corporation ("SPFC") and Auto Marketing
Network, Inc. ("AMN"). At June 30, 1997, Imperial Credit and its subsidiaries
had $2.28 billion of total consolidated assets and consolidated stockholders'
equity of $264.0 million.
Imperial Credit was organized in 1986 as a residential mortgage lender. In
1995, Imperial Credit began to reposition its business from originating and
selling conforming residential mortgage loans to offering higher margin loan
and lease products. It has sought to accomplish this through a business
strategy that emphasizes: (i) opportunistic expansion and acquisitions of
businesses in niche segments of the financial services industry,
(ii) underwriting and credit risk management, (iii) loan and lease
originations, where possible, on a wholesale basis, (iv) securitization or sale
in the secondary market of substantially all of its loans and leases, other
than those held for investment by SPTL or other affiliates, and (v) maintaining
business and financial flexibility to take advantage of changing market
conditions with respect to specific financial services businesses.
Imperial Credit and its affiliates have extensive experience in originating,
acquiring and managing portfolios of Real Estate Related Assets and arranging
structured finance transactions, including several substantial transactions
during the past year. Although many of the Company's prospective competitors
may have access to greater capital and other advantages, the Company believes
that the experience of Imperial Credit and its affiliates in originating and
acquiring Mortgage Loans and other loan and lease products, and creating,
acquiring and managing MBS Interests, will provide the Company with the means
to compete effectively. It should be noted, however, that Imperial Credit has
conducted its operations primarily through various subsidiaries and other
entities that may have investment objectives and investment guidelines that
differ from those of the Company. There can be no assurance that the resources
and relationships developed by Imperial Credit will enable the Company to be
successful.
MANAGEMENT AGREEMENT
The Company will enter into an agreement or agreements (collectively, the
"Management Agreement") with the Manager pursuant to which the Manager, subject
to the supervision of ICCMIC's Board of Directors, will assist the Board of
Directors in the formulation of operating strategies for the Company, advise
the Company concerning the acquisition of assets by the Company, advise the
Company concerning various types of financing for the Company, including the
issuance of CMOs and the use of warehouse lines of credit, reverse repurchase
agreements, bank credit facilities, mortgage loans on Real Property and other
borrowings, monitor the performance of the Company's assets and provide certain
administrative and managerial services in connection with the operation of the
Company. For performing these services, the Manager will receive (i) a base
management fee, calculated as a percentage of the Average Invested Assets of
the Company for each calendar quarter and equal to 1% per annum of the first
$1 billion of such Average Invested Assets, .75% of the next $250 million of
such Average Invested Assets, and .50% of Average Invested Assets above
$1.25 billion, which is intended, among other things, to cover the Manager's
costs of providing management services to the Company, and (ii) a quarterly
incentive fee in an amount equal to the product of (A) 25% of the dollar amount
by which (1)(a) Funds From Operations of the Company (before the incentive fee)
per share of Common Stock (based on the weighted average number of shares
outstanding) plus (b) gains (or minus losses) from debt restructuring or sales
of property per share of Common Stock (based on the weighted average number of
shares outstanding), exceed (2) an amount equal to (a) the weighted average of
the price per share at initial public offering and the prices per share at any
secondary offerings by the Company multiplied by (b) the Ten-Year U.S. Treasury
Rate
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plus four percent per annum multiplied by (B) the weighted average number of
shares of Common Stock outstanding during such quarter. The Board of Directors
of the Company may adjust the base management fee in the future if necessary to
align the fee more closely with the actual costs of such services. In addition,
the Manager will be reimbursed for costs and expenses in employing third-
parties to perform due diligence on assets acquired or considered for
acquisition by the Company. See "Management of Operations."
Imperial Credit will purchase 1,980,000 shares of Common Stock on the Closing
Date at the initial public offering price, net of underwriting discounts and
commissions, after which Imperial Credit will own 9.9% of the Common Stock of
the Company. To provide an incentive for the Manager to enhance the value of
the Common Stock, the Company will grant the Manager and certain directors and
executive officers of the Manager options to purchase 2,000,000 shares of
Common Stock (2,300,000 shares if the Underwriters fully exercise their over-
allotment option), at a price per share equal to the initial offering price of
the Common Stock. One third of these stock options will be exercisable on each
of the first three anniversaries of the closing date of this Offering (the
"Closing Date"). Unexercised stock options will terminate on the tenth
anniversary of the Closing Date. See "Management of Operations--Stock Options."
OPERATING POLICIES AND STRATEGIES
MORTGAGE LOANS AND MBS INTERESTS. The primary focus of the Company's
investment strategy will be to acquire multifamily and commercial Mortgage
Loans and MBS Interests. In order to invest the net proceeds of the Offering to
provide current returns, the Company intends to use the proceeds of the
Offering to acquire Mortgage Loans and MBS Interests from Imperial Credit and
SPTL, and in the future may acquire additional Mortgage Loans and MBS
Interests, as well as Real Property and Non Real Estate Assets.
Certain of the Mortgage Loans acquired as part of the Initial Investments are
affected by below-market "teaser" interest rates, which generally expire within
24 months after their date of origination. Assuming that market interest rates
remain at today's levels, the interest rate payable on those Mortgage Loans is
anticipated to increase after the expiration of such teaser rates. See "Initial
Investments," and "Yield Considerations Related to the Company's Investments."
The Company intends, after completion of the Offering, to securitize these
Mortgage Loans by issuing CMOs, retaining the Mortgage Loans subject to such
CMO debt, to create yields commensurate with the investment strategies of the
Company. The Company intends to utilize the proceeds from securitizations and
other borrowings secured by its Mortgage Loans and MBS Interests to make
further investments in Mortgage Loans and MBS Interests, and to repeat the
process described above until it has significantly leveraged its investment
portfolio. Investors should be aware that it may take considerable time for the
Company to implement its strategy and significantly leverage its investment
portfolio, and that the Company may not be able successfully to implement that
strategy.
One of the Company's primary investment focuses will be the acquisition of
non-investment grade classes of MBS Interests and certain other classes of MBS
Interests, including POs, IOs, Sub IOs and Inverse IOs. These MBS Interests
offer the potential of a higher yield than relatively more senior classes of
MBS Interests, but carry greater credit and prepayment risk. The Company
believes that a managed portfolio of such MBS Interests can produce attractive
returns in a variety of interest rate environments. However, these investments
can present risks. See "Operating Policies and Objectives--The Company's
Assets," "Risk Factors--Risks Related to Investments in MBS Interests--
Prepayment and Interest Rate Risks Related to Subordinated MBS Interests, IOs
and POs" and "--Credit Risks of Subordinated MBS Interests."
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<PAGE>
SPTL will enter into an agreement granting the Company, so long as the
Management Agreement with the Manager remains in effect, a right of first offer
to purchase, in addition to the Initial Investments, not less than $150 million
annually of multifamily and commercial Mortgage Loans typical of loans
originated by SPTL. Although not contractually committed to do so, the Company
intends to purchase Mortgage Loans offered to it pursuant to the foregoing
right of first offer, provided such purchase would comply with the Company's
guidelines and underwriting criteria as established and modified from time to
time. The Company believes that SPTL's Mortgage Loans will be appropriate
investments for the Company given the Company's investment strategy.
The Company expects to maintain a relationship with Imperial Credit and SPTL
in which the Company will be a ready, willing and able purchaser of MBS
Interests that may be offered from time to time by Imperial Credit and SPTL.
Although no binding commitment will exist on the part of Imperial Credit, SPTL
or the Company regarding the sale and purchase of MBS Interests, the Company
expects to be able to purchase MBS Interests from Imperial Credit and SPTL on
terms and at prices meeting the Company's investment criteria. The Company
expects that Imperial Credit and SPTL will offer to sell assets to the Company
on terms and at prices that, in the aggregate, will be fair to both parties.
The members of the Company's Board of Directors who are unaffiliated with the
Manager (the "Independent Directors") will review on a quarterly basis all of
the Company's transactions with Imperial Credit and its affiliates occurring
after the Company's purchase of the Initial Investments. See "Management of
Operations--Certain Relationships; Conflicts of Interest."
OTHER ASSETS. The Company will take an opportunistic approach to
investments, and accordingly will invest in assets other than Term Loans and
MBS Interests. The Company may invest in Distressed Mortgage Loans, loans used
to finance construction or rehabilitation on the underlying Real Property
("Construction Loans") and loans secured by junior liens on Real Property
("Mezzanine Loans"). The Company also may invest in RMBS.
In addition, the Company may invest in Real Property, including Distressed
Real Property. The Company also may invest in Real Property located outside the
United States and may invest in Mortgage Loans secured by such Real Property.
An investment in Real Property located in foreign countries contains risks
associated with the uncertainty of foreign laws and markets and currency
conversion risks, as well as foreign tax consequences. See "Risk Factors--Risks
Related to Investments in Real Property--Foreign Real Properties are Subject to
Currency Conversion Risks, Foreign Tax Laws and Uncertainty of Foreign Laws."
The Company also may invest in Real Property with known material environmental
problems and Mortgage Loans secured by such Real Property. See "Risk Factors--
Risks Related to Investments in Real Property--Real Properties with Known
Environmental Problems May Create Liability for the Company." Investing in Real
Property may generate depreciation deductions, which the Company might be able
to utilize to offset any adverse tax consequences associated with the accrual
of interest and other income by the Company without a corresponding receipt of
cash. See "Risk Factors--Legal and Tax Risks--Tax Risks."
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<PAGE>
The Company also may acquire Non Real Estate Assets, but only to the extent
that the Company's status as a REIT and its exemption from regulation under the
Investment Company Act would not be jeopardized. The Company believes that its
ability to acquire Non Real Estate Assets may enable it to diversify its asset
base and to exploit opportunities in the marketplace that otherwise would not
be available.
LEVERAGE. The Company's strategy is to finance a significant portion of its
assets through CMO issuances, reverse repurchase agreements and warehouse
financing. The use of leverage creates certain risks for the Company. See "Risk
Factors--Economic and Business Risks--Leverage Can Reduce Income Available for
Distribution." A substantial portion of the Company's borrowings are expected
to be in the form of reverse repurchase agreements that are based on the market
value of the MBS Interests pledged to secure the specific borrowings. A decline
in the market value of those MBS Interests could limit the Company's ability to
borrow or result in lenders initiating margin calls, requiring the Company to
sell assets under adverse market conditions in order to maintain liquidity. If
these sales were made at prices lower than the carrying value of the assets,
the Company would experience losses. A substantial portion of the Company's
cash flow is expected to consist of the difference between the interest income
generated by its Mortgage Loans and MBS Interests and the interest expense
incurred with respect to such financings, net of hedging costs. The Company may
hedge all or a portion of the interest rate risks associated with its
financings through the use of interest rate caps and swaps. The Company also
may engage in a variety of interest rate risk management techniques for the
purpose of managing the effective maturity or interest rate of its assets.
These techniques also may be used to attempt to protect against declines in the
market value of the Company's assets resulting from general economic and market
trends. Any such hedging and other interest rate risk management techniques are
subject to risks and may affect adversely the Company's earnings.
CONFLICTS OF INTEREST
The Company will be managed by the Manager, a wholly-owned subsidiary of
Imperial Credit. The Company will acquire the Initial Investments from Imperial
Credit and SPTL, and anticipates acquiring substantial additional assets from
Imperial Credit and its affiliates following completion of the Offering.
Because of the Company's relationship with the Manager and Imperial Credit, the
Company will be subject to various potential conflicts of interest.
To protect the Company's stockholders from risks related to these potential
conflicts, a majority of the Company's Board of Directors will be Independent
Directors. The Independent Directors are expected to approve the Company's
acquisition of the Initial Investments, the execution of the Management
Agreement and general guidelines for the Company's investments, borrowings and
operations (the "Guidelines"). Although the Manager will perform the day to day
operations of the Company, the Independent Directors will review all
transactions on a quarterly basis to insure compliance with the Guidelines. In
such a review, the Independent Directors are expected to rely primarily on
information provided by the Manager.
THE OFFERING
<TABLE>
<S> <C>
Shares offered to the public (1)..................................... 20,000,000
Shares to be outstanding after the Offering (1)(2)................... 20,000,000
Proposed Nasdaq Symbol............................................... ICMI
</TABLE>
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(1) Assumes the Underwriters' over-allotment option is not exercised.
(2) Does not include 6,700,000 shares reserved for issuance pursuant to the
Company's Stock Option Plan. Options for 2,000,000 (2,300,000 if the
Underwriters' over-allotment option is fully exercised) are expected to be
granted to the Manager and certain employees of the Manager prior to the
consummation of the Offering. See "Management of Operations--Stock
Options," "Capitalization" and "Description of Capital Stock."
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<PAGE>
USE OF PROCEEDS
The Company has contracted with Imperial Credit and SPTL (subject to the
consent of the Independent Directors) to purchase certain assets upon
completion of this Offering for a purchase price of approximately $206 million,
which is equal to approximately 74% of the expected net proceeds of this
Offering. These assets will consist primarily of Mortgage Loans and MBS
Interests. See "Initial Investments." The Company intends to invest the balance
of the net proceeds of this Offering temporarily in readily marketable,
interest-bearing securities. See "Operating Policies and Objectives."
DISTRIBUTION POLICY
ICCMIC intends to make distributions to its stockholders of at least 95% of
the Company's taxable income each year (subject to certain adjustments) so as
to qualify for the tax benefits accorded to REITs under the Code. ICCMIC
intends to make distributions at least quarterly. It is anticipated that the
first distribution to stockholders will be made promptly after the first full
calendar quarter following the Closing Date.
TAX STATUS OF THE COMPANY
ICCMIC intends to qualify and will elect to be taxed as a REIT under sections
856 through 860 of the Code, commencing with its short first taxable year
ending December 31, 1997. If ICCMIC qualifies for taxation as a REIT, ICCMIC
generally will not be subject to federal corporate income tax on its taxable
income that is distributed to its stockholders. A REIT is subject to a number
of organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its annual taxable income. Although ICCMIC
does not intend to request a ruling from the Internal Revenue Service (the
"Service") as to its REIT status, ICCMIC has received an opinion of its legal
counsel that ICCMIC qualifies as a REIT, which opinion is based on certain
assumptions and representations about the Company's ongoing businesses and
investment activities and other matters. No complete assurance can be given
that the Company will be able to comply with such assumptions and
representations in the future. Furthermore, such opinion is not binding on the
Service or on any court. Failure to qualify as a REIT would render ICCMIC
subject to federal income tax (including any applicable alternative minimum
tax) on its taxable income at regular corporate rates and distributions to
ICCMIC's stockholders would not be deductible. Even if ICCMIC qualifies for
taxation as a REIT, the Company may be subject to certain federal, state, local
and foreign taxes on its income and property. ICCMIC's Charter provides for
ICCMIC's taxable year to be the calendar year. In connection with ICCMIC's
election to be taxed as a REIT, ICCMIC's Corporate Charter ("Charter") imposes
restrictions on the transfer and ownership of its Common Stock. See "Risk
Factors--Legal and Tax Risks--Tax Risks" and "Federal Income Tax
Considerations--Taxation of the Company."
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ORGANIZATION AND RELATIONSHIPS
The Manager will manage the day-to-day operations of the Company, subject to
the supervision of ICCMIC's Board of Directors. The relationship among ICCMIC,
its affiliates and the Manager is depicted in the organization chart shown
below.
[ORGANIZATIONAL CHART OF THE COMPANY AND ITS AFFILIATES AND A DEPICTION OF
THE RELATIONSHIPS BETWEEN THE COMPANY AND IMPERIAL CREDIT AND ITS AFFILIATES]
- --------
(1) ICCMIC will issue 9.9% of its Common Stock to Imperial Credit and 90.1% of
its Common Stock to public investors (including up to 2% of its Common
Stock to directors, officers and employees of the Company or the Manager,
members of their respective families, and certain other persons).
(2) ICCMIC has incorporated and capitalized a qualified REIT subsidiary,
Imperial Credit Mortgage Securitization Corp. ("ICMSC"), which will be used
as a vehicle primarily for the issuance of CMOs collateralized by Mortgage
Loans transferred from ICCMIC.
(3) Imperial Credit has incorporated and capitalized the Manager.
(4) The Manager will enter into a Management Agreement with ICCMIC, pursuant to
which the Manager will formulate operating strategies and provide certain
managerial and administrative functions for the Company, subject to the
supervision of ICCMIC's Board of Directors.
(5) Imperial Credit and SPTL will sell the Initial Investments to ICCMIC for
cash.
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This prospectus contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, which can be identified
by the use of forward-looking terminology such as "may," "will," "should,"
"expect," "anticipate," "estimate" or "continue" or the negatives thereof or
other comparable terminology. The Company's actual results could differ
materially from those anticipated in such forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and the other factors described elsewhere in this Prospectus.
RISK FACTORS
An investment in the Common Stock involves various risks. Before purchasing
shares of Common Stock offered hereby, prospective investors should consider
carefully the information set forth below, in addition to the information set
forth elsewhere in this Prospectus.
RISKS RELATED TO INVESTMENTS IN MORTGAGE LOANS
GREATER RISKS OF LOSS FROM MULTIFAMILY AND COMMERCIAL LOANS. The Mortgage
Loans that the Company expects to acquire generally will be secured by
existing multifamily or commercial real estate, including apartments, shopping
centers, office buildings, hotels, industrial properties, theme parks,
hospitals, and nursing homes. Property pledged as security for Mortgage Loans
is referred to as "Mortgaged Property." Multifamily and commercial real estate
lending is considered to involve a higher degree of risk than single family
residential lending because of a variety of factors, including generally
larger loan balances, dependency on successful operation of the Mortgaged
Property and tenants operating businesses therein for repayment, and loan
terms that often require little to no amortization and, instead, provide for
balloon payments at stated maturity. In addition, the value of multifamily and
commercial real estate can be affected significantly by the supply and demand
in the market for that type of property. Market values may vary as a result of
economic events, governmental regulations or other factors outside the control
of the borrower or the Company, such as rent control laws in the case of
multifamily Mortgage Loans, which may impact the future cash flow of the
underlying Mortgaged Property.
The successful operation of a multifamily or commercial real estate project
also generally is dependent on the performance and viability of the property
manager of that project. The property manager would be responsible for
responding to changes in the local market, planning and implementing the
rental structure, including establishing appropriate rental rates, and
advising the owner so that maintenance and capital improvements can be carried
out in a timely fashion and at an appropriate cost. There can be 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 leases
or management agreements or following any default or foreclosure under a
Mortgage Loan.
GREATER RISK OF LOSS FROM LIMITED RECOURSE LOANS. The Company anticipates
that a substantial portion of the Mortgage Loans that it will acquire and of
the mortgage loans underlying MBS Interests that it will acquire (mortgage
loans underlying MBS Interests are referred to as "Mortgage Collateral") may
contain limitations on the mortgagee's recourse against the borrower. In other
cases, the mortgagee's recourse against the borrower may be limited by
applicable provisions of the laws of the jurisdictions in which the Mortgaged
Properties are located or by the mortgagee's selection of remedies and the
impact of those laws on that selection. In those cases, in the event of a
borrower default, recourse may be limited to only the specific Mortgaged
Property and other assets, if any, pledged to secure the relevant Mortgage
Loan. As to those Mortgage Loans that provide for recourse against the
borrower and its assets generally, there can be no assurance that such
recourse will provide a recovery in respect of a defaulted Mortgage Loan
greater than the liquidation value of the Mortgaged Property securing that
Mortgage Loan.
VOLATILITY OF VALUES OF MORTGAGED PROPERTIES. Commercial and multifamily
property values and net operating income derived therefrom are subject to
volatility and may be affected adversely by a number of factors, including,
but not limited to, national, regional and local economic conditions (which
may be impacted
13
<PAGE>
adversely by plant closings, industry slowdowns and other factors); local real
estate conditions (such as an oversupply of housing, retail, industrial,
office or other commercial space); changes or continued weakness in specific
industry segments; perceptions by prospective tenants and, in the case of
retail properties, retailers and shoppers, of the safety, convenience,
services and attractiveness of the property; the willingness and ability of
the property's owner to provide capable management and adequate maintenance;
construction quality, age and design; demographic factors; retroactive changes
to building or similar codes; and increases in operating expenses (such as
energy costs). The historical operating results of the Mortgaged Properties
may not be comparable to future operating results. In addition, other factors
may affect adversely the Mortgaged Properties' value without affecting the 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.
GREATER RISKS OF LOSS FROM CONSTRUCTION AND MEZZANINE LOANS. The Company may
acquire loans, the proceeds of which are to be used for the construction or
rehabilitation of multifamily and commercial Real Property ("Construction
Loans") and, in some cases, loans secured by junior liens on Real Property
("Mezzanine Loans"). Construction Loans and Mezzanine Loans are considered to
involve a higher degree of risk than term mortgage lending secured by income
producing Real Property. This is because of a variety of factors, including,
in the case of Construction Loans, dependency on successful completion and
operation of the project for repayment, difficulties in estimating
construction or rehabilitation costs, and loan terms that often require little
to no amortization, providing instead for additional advances to be made and
for a balloon payment at a stated maturity date. In the case of Mezzanine
Loans, the factors would include, among other things, that a foreclosure by
the holder of the senior loan could result in a Mezzanine Loan becoming
unsecured and the Company may not recover the full amount, or indeed any, of
its investment in such Mezzanine Loan. In addition, Construction Loans and
Mezzanine Loans may have higher loan to value ratios than conventional Term
Loans because of shared appreciation provisions. Although the borrower may
have an initial equity investment of 10% to 15% of total project costs, such
initial equity may not be sufficient to protect the Company's investment in
Construction Loans and Mezzanine Loans.
DEFAULT RISKS ASSOCIATED WITH DISTRESSED MORTGAGE LOANS. The Company may
acquire Nonperforming and Subperforming Mortgage Loans, as well as Mortgage
Loans that have had a history of delinquencies. These Mortgage Loans presently
may be in default or may have a greater than normal risk of future defaults
and delinquencies, as compared to newly originated, high quality loans.
Returns on an investment of this type depend on the borrower's ability to make
required payments (or, with respect to Subperforming Loans, the modified
monthly payments required under the applicable forbearance plan) or, in the
event of default, the ability of the loan's servicer to foreclose and
liquidate the Mortgaged Property underlying the Mortgage Loan. There can be no
assurance that the servicer can liquidate a defaulted Mortgage Loan
successfully or in a timely fashion. See "Certain Legal Aspects of Mortgage
Loans and Real Property Investments."
GEOGRAPHIC CONCENTRATION IN CALIFORNIA. Approximately two-thirds of the
Mortgaged Properties underlying the Mortgage Loans and the MBS Interests that
will comprise the Initial Investments are located in California. Moreover, the
Company anticipates acquiring a large volume of assets from SPTL, and
approximately two-thirds of the Mortgage Loans originated by SPTL are secured
by Mortgaged Properties located in California. California recently began to
recover from an economic recession that has affected California since the
early 1990s. The Company's performance and its ability to make distributions
to its stockholders likely will be affected significantly by future economic
conditions in California. See "--Volatility of Values of Mortgaged
Properties."
DELINQUENCY AND LOSS RATIOS MAY BE AFFECTED BY PERFORMANCE OF THIRD-PARTY
SERVICERS. The Company intends to contract for the servicing of its Mortgage
Loans with third-party servicers and will be subject to risks associated with
inadequate servicing. Many borrowers require notices and reminders to keep
Mortgage Loans current and to prevent delinquencies and foreclosures. A
substantial increase in the delinquency or foreclosure rate resulting from
inadequate servicing could affect adversely the Company's performance and
ability to access profitably the capital markets for its financing needs,
including future securitizations.
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<PAGE>
The Company's servicing agreements with its third-party servicers generally
will provide that if the Company terminates the agreement without cause (as
defined in the agreement), the Company may be required to pay the third-party
servicer a termination fee. Depending upon the size of the particular Mortgage
Loan portfolio then being serviced, the termination fee that the Company would
be obligated to pay upon termination of a servicing agreement without cause
could be substantial and could deter a termination otherwise advantageous to
the Company.
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.
The servicer of the mortgage obligation may be required to foreclose first on
properties located in states where such "one action" rules apply (and when
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 and Real Property
Investments--Foreclosure."
RISKS RELATED TO INVESTMENTS IN MBS INTERESTS
CREDIT RISKS OF SUBORDINATED MBS INTERESTS. The Company intends to acquire a
significant amount of various classes of MBS Interests, including "first loss"
classes of subordinated MBS Interests. A first loss class is the most
subordinated class of a multi-class issuance of pass-through or debt
securities and is the first to bear the loss upon a default on the underlying
collateral. Subordinated MBS Interests are subject to special risks, including
a substantially greater risk of loss of principal and non-payment of interest
than more senior classes. The market values of subordinated classes of MBS
Interests tend to be more sensitive to changes in economic conditions than
more senior classes. As a result of these and other factors, subordinated MBS
Interests generally are not actively traded and may not provide holders
thereof with liquidity of investment.
The yield to maturity on subordinated MBS Interests of the type the Company
intends to acquire will be extremely sensitive to the default and loss
experience of the underlying Mortgage Collateral and the timing of any such
defaults or losses. Because the subordinated classes of the type the Company
intends to acquire generally have no credit support, to the extent there are
realized losses on the Mortgage Collateral, the Company may not recover the
full amount or, indeed, any of its investment in such subordinated MBS
Interests.
When the Company acquires a subordinated MBS Interest, it typically will be
unable to obtain the right to service the underlying performing Mortgage
Collateral. To minimize its losses, the Company will seek to obtain the rights
to service the underlying Mortgage Collateral in default (rights to service
defaulted mortgage loans are referred to as "Special Servicing" rights),
although in many cases it will not be able to obtain Special Servicing rights
on acceptable terms. If the Company does acquire Special Servicing rights,
then it will contract with a third-party special servicer to perform the
Special Servicing functions, and thus the Company's returns will be dependent
upon such third party's performance. To the extent the Company does not obtain
Special Servicing rights with respect to the Mortgage Collateral underlying
its MBS Interests, the servicer of the Mortgage Collateral generally would be
responsible to holders of the senior classes of MBS, whose interests may not
be the same as those of the holders of the subordinated classes. Accordingly,
the Mortgage Collateral may not be serviced in the same manner as they would
be serviced by the Company or in a manner that is most advantageous to the
Company as the holder of a subordinated class.
The subordination of MBS Interests to more senior classes may affect the
yield on the subordinated MBS Interests adversely even if realized losses
ultimately are not allocated to such classes. On any payment date, interest
and principal generally would be paid on the more senior classes before
interest and principal would be paid with respect to the subordinated classes.
Typically, interest deferred on these classes would be payable on subsequent
payment dates to the extent funds become available, but such deferral itself
may not bear interest. Such deferral of interest generally will affect
adversely the yield on the subordinated classes.
PREPAYMENT AND INTEREST RATE RISKS RELATED TO SUBORDINATED MBS INTERESTS,
IOS AND POS. The yield on subordinated classes generally will be affected by
the rate and timing of payments of principal on the
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Mortgage Collateral underlying a series of MBS. The rate of principal payments
may vary significantly over time depending on a variety of factors such as the
level of prevailing mortgage loan interest rates and economic, demographic,
tax, legal and other factors. Prepayments on the Mortgage Collateral
underlying a series of MBS Interests generally are allocated to the more
senior classes of MBS until those classes are paid in full or until the end of
a lock-out period, typically of five years or more. Thus, prepayments of
principal from the Mortgage Collateral generally are not received by the
subordinated class holders for a period of at least five years. As a result,
the weighted-average lives of the subordinated classes may be longer than
would be the case if, for example, prepayments were allocated pro rata to all
classes of MBS. To the extent that the holder of a subordinated class is not
paid compensating interest on interest shortfalls due to prepayments,
liquidations or otherwise, the yield on the subordinated class may be affected
adversely.
The Company may acquire IOs, which are classes of MBS Interests that are
entitled to no (or only nominal) payments of principal, but only to payments
of interest. The yield to maturity of IOs is very sensitive to changes in the
weighted average life of such securities, which in turn is dictated by the
rate of prepayments on the underlying Mortgage Collateral. In periods of
declining interest rates, rates of prepayments on mortgage loans generally
increase, and if the rate of prepayments is faster than anticipated, then the
yield on IOs will be negatively affected. Inverse IOs are a class of MBS that
bear interest at a floating rate that varies inversely with (and often at a
multiple of) changes in a specified index. The Company may invest in Inverse
IOs for the purpose of, among other things, hedging its portfolio of IOs. The
yield to maturity of an Inverse IO generally is extremely sensitive to changes
in the related index. The Company also expects to invest in Sub IOs, a class
for which interest generally is withheld and used to make principal payments
on more senior classes or to fund a reserve account for the protection of
senior classes until overcollateralization or until the balance in the reserve
account reaches a specified level. In those cases, interest on the Sub IO
generally will be paid only after the overcollateralization or the balance in
the reserve account reaches the specified level. Sub IOs provide credit
support to the senior classes, and thus bear substantial credit risk.
Moreover, because all IO classes only receive interest payments, their yields
are extremely sensitive not only to default losses but also to changes in the
weighted average life of the relevant classes, which in turn will be dictated
by the rate of prepayments on the underlying Mortgage Collateral. In addition,
Sub IOs often generate taxable income in excess of cash received. See "--Legal
and Tax Risks--Tax Risks."
The Company may acquire POs, which are classes of MBS Interests that are
entitled to no payments of interest, but only to payments of principal. The
yield to maturity of POs is very sensitive to changes in the weighted average
life of such securities, which in turn is dictated by the rate of prepayments
on the underlying Mortgage Collateral. In periods of declining interest rates,
rates of prepayment on mortgage loans generally increase, and if the rate of
prepayments is faster than anticipated, the yield on POs will be positively
affected. Conversely, POs will be negatively affected by slower than
anticipated prepayment rates, which generally are associated with a rising
interest rate environment. In addition, POs typically generate OID. See "--
Legal and Tax Risks--Tax Risks."
REMIC RESIDUAL INTERESTS AND OTHER MBS INTERESTS MAY GENERATE TAXABLE INCOME
IN EXCESS OF CASH RECEIVED. The Company also may invest in certain classes of
MBS Interests issued by a real estate mortgage investment conduit ("REMIC")
that are designated as the residual interest in the REMIC (a "REMIC Residual
Interest"). In addition, the Company may invest in residual interests in
Mortgage Loans subject to CMO debt ("Non-REMIC Residual Interests"). In any
given year, the taxable income produced by REMIC Residual Interests and Non-
REMIC Residual Interests may exceed its cash receipts and economic income. See
"--Legal and Tax Risks--Tax Risks." The Company intends to invest in various
types of MBS Interests, including, but not limited to, subordinated MBS
Interests, Sub IOs and POs, which are subordinated to more senior classes of
MBS Interests. These MBS Interests may generate original issue discount
("OID") or, as a result of subordination, the recognition of taxable income in
excess of cash received. See "--Legal and Tax Risks--Tax Risks."
RISKS RELATED TO INVESTMENTS IN REAL PROPERTY.
VALUE OF REAL PROPERTY DEPENDENT ON CONDITIONS BEYOND COMPANY'S
CONTROL. Real Properties are subject to varying degrees of risk as described
under "Risk Factors--Risks Related to Investments in Mortgage
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Loans--Volatility of Values of Mortgaged Properties." In addition, Distressed
Real Properties may have significant amounts of unleased space and thus may
not generate revenues sufficient to pay operating expenses or meet debt
service obligations. The underlying value of Real Property and the Company's
income and ability to make distributions to its stockholders will be dependent
upon the ability of the Manager to operate that Real Property in a manner that
maintains or increases revenues in excess of operating expenses and debt
service or, in the case of Real Property leased to a single lessee, the
ability of the lessee to make rent payments. Revenues from Real Property may
be affected adversely by changes in national or local economic conditions,
competition from other properties offering the same or similar attributes,
changes in interest rates and in the availability, cost and terms of mortgage
funds, the impact of present or future environmental legislation and
compliance with environmental laws, the ongoing need for capital improvements
(particularly in older structures), changes in real estate tax rates and other
operating expenses, adverse changes in governmental rules and fiscal policies,
civil unrest, acts of God, including earthquakes, hurricanes and other natural
disasters (which may result in uninsured or underinsured losses), acts of war,
adverse changes in zoning laws, and other factors which will be beyond the
control of the Company.
THE COMPANY'S INSURANCE WILL NOT COVER ALL LOSSES. The Company intends to
maintain comprehensive casualty insurance on all Real Property, including
liability and fire and extended coverage, in amounts sufficient to permit
replacement in the event of a total loss, subject to applicable deductibles.
The Company will endeavor to obtain coverage of the type and in the amount
customarily obtained by owners of properties similar to its properties. There
are certain types of losses, however, generally of a catastrophic nature, such
as earthquakes, floods and hurricanes, that may be uninsurable or not
economically insurable. Inflation, changes in building codes and ordinances,
environmental considerations, provisions in loan documents encumbering
properties that have been pledged as collateral security for loans, and other
factors also might make it not feasible to use insurance proceeds to replace a
property if it is damaged or destroyed. Under such circumstances, the
insurance proceeds received by the Company, if any, might not be adequate to
restore the Company's equity with respect to the affected property.
PROPERTY TAXES DECREASE RETURNS ON REAL ESTATE. All Real Property owned by
the Company will be subject to real and, in some instances, personal property
taxes. Such real and personal property taxes may increase or decrease as
property tax rates change and as the properties are assessed or reassessed by
taxing authorities. An increase in property taxes on the Company's properties
could materially and adversely affect the Company's income and ability to make
distributions to its stockholders or could decrease the value of the
properties.
COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND OTHER CHANGES IN
GOVERNMENTAL RULES AND REGULATIONS MAY BE COSTLY. Under the Americans with
Disabilities Act of 1990 (the "ADA"), all public properties are required to
meet certain federal requirements related to access and use by disabled
persons. Real Properties owned by the Company may not be in compliance with
the ADA. If such Real Property is not in compliance, the Company may be
required to make modifications to bring it into compliance, or face the
possibility of an imposition of fines or an award of damages to private
litigants. In addition, changes in governmental rules and regulations or
enforcement policies affecting the use and operation of the Company's
properties, including changes to building codes and fire and life-safety
codes, may occur. If the Company were required to make substantial
modifications at its properties to comply with the ADA or other changes in
governmental rules and regulations, the Company's income and ability to make
distributions to its stockholders could be materially and adversely affected.
PROPERTIES WITH HIDDEN ENVIRONMENTAL PROBLEMS MAY INCREASE COSTS AND CREATE
LIABILITIES FOR THE COMPANY. Operating costs and values of Real Property may
be affected by the obligation to pay for the cost of complying with existing
environmental laws, ordinances and regulations, as well as the cost of
complying with future legislation. 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 in, on, under or in the vicinity
of such Real 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
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toxic substances. The Company's income and ability to make distributions to
its stockholders could be materially and adversely affected by the existence
of an environmental liability with respect to its properties.
The Company may obtain Phase I environmental assessments on Real Properties
prior to their acquisition. The purpose of Phase I environmental assessments
is to identify existing and potential environmental contamination that is made
apparent from historical reviews of the properties, reviews of certain public
records, preliminary investigations of the sites and surrounding properties,
and screening for the presence of hazardous substances, toxic substances and
underground storage tanks. However, the Company will exercise judgment on this
issue and may choose not to obtain Phase I environmental assessments and to
purchase loans without Phase I environmental assessments if it deems that to
do so is prudent. Further, even if a Phase I environmental assessment is
obtained, there is no assurance it will reveal all existing and potential
environmental risks and liabilities, and there is no assurance that there will
be no unknown or material environmental obligations or liabilities.
REAL PROPERTIES WITH KNOWN ENVIRONMENTAL PROBLEMS MAY CREATE LIABILITY FOR
THE COMPANY. The Company may invest in Real Property, or mortgage loans
secured by Real Property, with known environmental problems that materially
impair the value of the Real Property ("Environmentally Distressed Real
Property"). If so, the Company may take certain steps to limit its liability
for such environmental problems, such as creating a special purpose entity to
own Environmentally Distressed Real Property. Despite these steps, there are
risks associated with such an investment. Imperial Credit has only limited
experience in investing in Real Property with known environmental risks.
FOREIGN REAL PROPERTIES ARE SUBJECT TO CURRENCY CONVERSION RISKS, FOREIGN
TAX LAWS AND UNCERTAINTY OF FOREIGN LAWS. The Company may invest in Real
Property, or mortgage loans secured by Real Property, located outside the
United States. Investing in Real Property located in foreign countries creates
risks associated with the uncertainty of foreign laws and markets. Moreover,
investments in foreign assets are subject to currency conversion risks. In
addition, income from investment in foreign Real Property and, in some
instances, foreign mortgage loans may be subject to tax by foreign
jurisdictions, which would reduce the economic benefit of such investments.
Imperial Credit and its affiliates have limited experience in investing in
foreign Real Property. The Company intends to limit its investments in foreign
Real Property to no more than 20% of the Company's portfolio.
ECONOMIC AND BUSINESS RISKS
INTEREST RATE CHANGES MAY ADVERSELY AFFECT THE COMPANY'S INVESTMENTS. The
value of the Company's Mortgage Loans will be affected by the prepayment rates
on such Mortgage Loans, although multifamily and commercial Mortgage Loans,
which will be the Company's primary investment focus, generally provide for
lock-out periods and prepayment penalties that reduce this risk. No assurance
can be made that prepayment penalties will deter prepayments. Similarly, the
value of the Company's MBS Interests will be affected by the prepayment rates
on the mortgage loans comprising the Mortgage Collateral for such securities.
Prepayment rates on Mortgage Loans and MBS are influenced by changes in
current interest rates and a variety of economic, geographic and other factors
and cannot be predicted with certainty. In periods of declining mortgage
interest rates, prepayments on Mortgage Loans and MBS Interests, particularly
single-family Mortgage Loans and MBS Interests collateralized by single-family
Mortgage Loans, generally increase. If general interest rates also decline,
the amounts available for reinvestment by the Company during such periods are
likely to be reinvested at lower interest rates than the Company was earning
on the Mortgage Loans and MBS that were prepaid. Mortgage Loans and MBS may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed-income securities from declining interest rates because
of the risk of prepayment. In general, changes in both prepayment rates and
interest rates will change the total return on the Company's Mortgage Loans
and MBS Interests, which in turn will affect the amount available for
distribution to the Company's stockholders. This volatility may be greater
with certain MBS Interests, such as POs, IOs, Sub IOs and Inverse IOs, that
the Company intends to acquire. The value of adjustable rate Mortgage Loans
and MBS Interests paying adjustable coupon rates, which the Company may
acquire, generally will vary inversely with changes in
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prevailing interest rates. Under certain interest rate or prepayment rate
scenarios, the Company may fail to recoup fully its cost of acquisition of
such investments.
The Company's strategy is to leverage its investments significantly by
borrowing against them, investing the net proceeds of those borrowings in new
Mortgage Loans and MBS Interests, borrowing against those new assets, and
repeating the process of borrowing and reinvesting until it has a
significantly leveraged portfolio. See "Operating Policies and Objectives--
Strategy." The Company will be required to bear interest costs, transaction
costs, and other fees, costs and expenses related to its anticipated
borrowings that it will use in seeking to implement its strategy of achieving
a significantly leveraged portfolio. The Company's operating results depend in
part on the difference between the income earned on the Company's income-
generating assets and the interest expense incurred in connection with its
borrowings. See "--Leverage Can Reduce Income Available for Distribution." As
the positive spread between the two increases, the Company's net income should
increase. Accordingly, changes in the general level of interest rates can
affect the Company's income by affecting the spread between the Company's
income-generating assets and interest-bearing liabilities, as well as, among
other things, the value of the Company's interest-earning assets and its
ability to realize gains from the sale of assets and the average life of the
Company's interest-earning assets. Interest rates are highly sensitive to many
factors, including governmental monetary, fiscal and tax policies, domestic
and international economic and political considerations, and other factors
beyond the control or anticipation of the Company.
RISKS ASSOCIATED WITH HEDGING STRATEGIES. The Company's performance may be
affected adversely if the Company fails to employ an effective hedging
strategy to limit the effects of changes in interest rates on its operations,
including engaging in interest rate swaps, caps, floors and other interest
rate exchange contracts. The use of these types of instruments to hedge a
portfolio carries certain risks, including the risk that losses on a hedge
position will reduce the funds available for distribution to shareholders and,
indeed, that such losses may exceed the amount invested in such instruments.
There is no perfect hedge for any investment, and a hedge may not perform its
intended purpose of offsetting losses on an investment. Moreover, with respect
to certain of the instruments used as hedges for the Company's portfolio, the
Company may be exposed to the risk that the counterparties with which the
Company trades may cease making markets and quoting prices in such
instruments, which may render the Company unable to enter into an offsetting
transaction with respect to an open position. If the Company anticipates that
the income from any such hedging transaction will not be qualifying income for
REIT income test purposes, the Company may form a corporate subsidiary that is
fully subject to federal corporate income taxation, through which the Company
could conduct part or all of its hedging activities. See "Federal Income Tax
Considerations--Requirements for Qualification--Income Tests." The
profitability of the Company may be affected adversely during any period as a
result of changing interest rates.
LEVERAGE CAN REDUCE INCOME AVAILABLE FOR DISTRIBUTION. The Company's Charter
and Bylaws do not limit the amount of indebtedness the Company can incur. The
Company intends to leverage its assets through securitizations and other
borrowings, generally through the issuance of CMOs and the use of warehouse
lines of credit, reverse repurchase agreements, bank credit facilities and
other borrowings. The Company will leverage its assets only when it expects
that such leverage will enhance returns, although there can be no assurance
that the Company's use of leverage will prove to be beneficial. The percentage
of leverage used will vary depending on, among other things, the Company's
estimate of the cash flow that its Real Estate Related Assets will generate,
and the stability of that cash flow. Leverage can reduce the cash flow
available for distributions to stockholders. Moreover, there can be no
assurance that the Company will be able to meet debt service obligations
resulting from leverage and, to the extent that it cannot, the Company risks
the loss of some or all of its assets.
The Company intends to raise funds through short term floating rate
borrowings (reverse repurchase agreements) to acquire long term Mortgage Loans
and MBS Interests, some of which will bear a fixed rate of interest. Under
this strategy, borrowing costs may exceed the yield on the Company's assets
purchased with the borrowed funds, thereby reducing cash flows and returns to
the Company. Further, MBS subject to reverse repurchase agreements are
periodically marked to market by the lender, and a decline in the value of MBS
pledged to secure reverse repurchase agreements may result in margin calls.
Moreover, if renewals of or
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substitutes for maturing or called short term borrowings are unavailable to
the Company at that time for any reason, the Company may be required to sell
assets quickly to repay those borrowings. Certain of the MBS will be illiquid
and a sale associated with an abbreviated marketing period generally would
result in the Company receiving a lower price than otherwise would be
available. There can be no assurance that the Company will not have losses
associated with forced sales of illiquid collateral to repay borrowings.
Furthermore, the use of leverage will magnify the Company's exposure to
losses. For example, a loss equal to 20% of the value of an 80% leveraged
asset would eliminate the Company's equity in that asset completely, while the
same loss would leave the Company with 80% of its equity in the asset if no
leverage had been applied to that asset.
THE COMPANY MAY NOT BE ABLE TO BORROW MONEY ON FAVORABLE TERMS. The ability
of the Company to achieve its investment objectives through leverage will
depend on the Company's ability to borrow money on favorable terms. The
Company has not entered into any borrowing arrangements at the present time,
and there can be no assurance that the Company will be able to enter into
arrangements enabling it to borrow money on favorable terms.
ADVERSE CHANGES IN GENERAL ECONOMIC CONDITIONS CAN ADVERSELY AFFECT THE
COMPANY'S BUSINESS. The Company's success is dependent upon the general
economic conditions in the geographic areas in which a substantial number of
its investments are located. Adverse changes in national economic conditions
or in the economic conditions of the regions in which the Company conducts
substantial business likely would have an adverse effect on real estate
values, interest rates and, accordingly, the Company's business, net income
and ability to distribute cash to its stockholders. The general economic
conditions in the geographic areas in which the Company's investments are
located will be beyond the control of the Company.
POTENTIAL INTEREST RATE MISMATCH BETWEEN ASSET YIELDS AND BORROWING
RATES. The Company's borrowings may be at interest rates based on indexes and
repricing terms similar to, but of somewhat shorter maturities than, the
interest rate indexes and repricing terms of various of the Company's variable
rate assets. While the historical spread between relevant short-term interest
rate indexes has been relatively stable, there have been periods, such as the
1979 through 1982 high interest environment, when the spread between those
indexes was volatile. Further, certain of the Company's assets will bear fixed
rates of interest and have long term maturities. There can be no assurance
that such fixed rate of interest will exceed the variable rate of interest on
related borrowings. Interest rate mismatches could impact the Company's net
income in a material and adverse way, thus negatively impacting the Company's
financial condition, dividend yield and the market price of the Common Stock.
See "--Leverage Can Reduce Income Available for Distribution" and "--The
Company May Not Be Able to Borrow Money on Favorable Terms."
POTENTIAL INABILITY TO ACQUIRE ASSETS AT FAVORABLE SPREADS RELATIVE TO
BORROWING COSTS; COMPETITION AND SUPPLY. The Company's net income will depend,
in large part, on the Company's ability to acquire and originate Mortgage
Loans and MBS Interests having yields that produce favorable spreads over the
Company's borrowing costs. In acquiring Real Estate Related Assets, the
Company will compete with other REITs, investment banking firms, savings and
loan associations, banks, mortgage bankers, insurance companies, mutual funds,
other lenders, GNMA, FNMA, and other entities purchasing similar assets, many
of which have established operating histories and procedures, may have access
to greater capital and other resources, and may have other advantages over the
Company in conducting certain businesses and providing certain services. There
are several REITs similar to the Company and others may be organized in the
future. The effect of the existence of additional REITs may be to increase
competition for the available supply of Real Estate Related Assets
contemplated to be acquired by the Company. Increased competition for the
acquisition of Mortgage Loans and MBS Interests or a diminishment in the
available supply could result in higher prices and thus lower yields on such
Mortgage Loans and MBS Interests, which could further narrow (or drive
negative) the yield spread over borrowing costs. In addition, the Company's
competitors may seek to establish relationships with the financial
institutions and other firms from whom the Company intends to acquire such
assets. There can be no assurance that the Company will be able to acquire
sufficient Real Estate Related Assets at spreads above the Company's cost of
funds to achieve the Company's yield objectives. In addition, there can be no
assurance that a supply of Real Estate Related Assets suitable for acquisition
by the Company will continue to be available, or that changes in market
conditions or applicable laws will not affect the availability of suitable
Real Estate Related Assets.
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APPROPRIATE INVESTMENTS MAY NOT BE AVAILABLE AND FULL INVESTMENT OF NET
PROCEEDS MAY BE DELAYED. Not all of the Company's assets have been identified.
The Company intends to invest the remaining net proceeds of this Offering
(after purchase of the Initial Investments) in readily marketable, interest-
bearing securities on a temporary basis until the Company finds appropriate
Mortgage Loans, MBS Interests and Other Real Estate Related Assets in which to
invest. There can be no assurance, however, that the Company will identify
Mortgage Loans, MBS Interests, or Other Real Estate Related Assets that meet
its investment criteria or that any such assets will produce a return on the
Company's investment.
INVESTMENTS MAY BE ILLIQUID AND THEIR VALUE MAY DECREASE. Many of the
Company's assets are and will be relatively illiquid. In addition, MBS
Interests that the Company will acquire will include interests that will not
have been registered under the Securities Act of 1933 or other applicable
securities laws, resulting in a prohibition against transfer, sale, pledge, or
other disposition of those MBS Interests except in a transaction that is
exempt from the registration requirements of, or is in accordance with, those
laws. The ability of the Company to vary its portfolio in response to changes
in economic and other conditions will be relatively limited. No assurances can
be given that the fair market value of any group or component of the Company's
assets will not decrease in the future.
LEGAL AND TAX RISKS
TAX RISKS. ICCMIC intends to operate in a manner so as to qualify as a REIT
for federal income tax purposes. Although ICCMIC does not intend to request a
ruling from the Service as to its REIT status, ICCMIC has received an opinion
of its legal counsel that, based on certain assumptions and representations,
it so qualifies. Investors should be aware, however, that opinions of counsel
are not binding on the Service or any court. The REIT qualification opinion
only represents the view of counsel to ICCMIC based on counsel's review and
analysis of existing law, which includes no controlling precedent.
Furthermore, both the validity of the opinion and the continued qualification
of ICCMIC as a REIT will depend on ICCMIC's satisfaction of certain asset,
income, organizational, distribution and stockholder ownership requirements on
a continuing basis. If ICCMIC were to fail to qualify as a REIT in any taxable
year, ICCMIC would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates, and
distributions to stockholders would not be deductible by ICCMIC in computing
its taxable income. Any such corporate tax liability could be substantial and
would reduce the amount of cash available for distribution to stockholders,
which in turn could have an adverse impact on the value of, and trading prices
for, the Common Stock. Unless entitled to relief under certain Code
provisions, ICCMIC also would be disqualified from taxation as a REIT for the
four taxable years following the year during which ICCMIC ceased to qualify as
a REIT.
ICCMIC must distribute annually at least 95% of its taxable income
(excluding any net capital gain) in order to avoid corporate income taxation
of the earnings that it distributes. In addition, ICCMIC will be subject to a
4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the
sum of (i) 85% of its ordinary income for that year, (ii) 95% of its net
capital gain for that year, and (iii) 100% of its undistributed taxable income
from prior years.
ICCMIC intends to make distributions to its stockholders to comply with the
95% distribution requirement and to avoid the nondeductible excise tax.
However, there may be differences in timing between the recognition of taxable
income and the actual receipt of cash, requiring the Company to borrow funds,
issue capital stock or sell assets on a short-term basis to meet the 95%
distribution requirement and to avoid the nondeductible excise tax. The
requirement to distribute a substantial portion of ICCMIC's taxable income
could cause ICCMIC (i) to sell assets in adverse market conditions, (ii) to
distribute amounts that represent a return of capital, or (iii) to distribute
amounts that would otherwise be spent on future acquisitions, unanticipated
capital expenditures, or repayment of debt. Gain from the disposition of any
asset held primarily for sale to customers in the ordinary course of business
generally will be subject to a 100% tax. In addition, gain from the sale of
securities held for less than one year and Real Property (including interests
in Mortgage Loans secured by Real Property) held for less than four years
generally will be nonqualifying income for purposes of the 30% income test.
See "Federal Income Tax Considerations--Requirements for Qualification--Income
Tests."
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The Company expects to acquire MBS Interests and other debt obligations that
are deemed to have OID for federal income tax purposes, which generally is
equal to the difference between an obligation's issue price and its redemption
price. ICCMIC will be required to recognize as income each year the portion of
the OID that accrues during that year, which will increase the REIT
distribution requirement for that year, notwithstanding the fact that there
may be no corresponding contemporaneous receipt of cash by the Company.
The Company's planned investment in various types of subordinated MBS
Interests, particularly Sub IOs, also could result in the recognition during a
taxable year of taxable income, in addition to OID, in excess of the Company's
cash receipts. The payment of interest on certain types of subordinated MBS
Interests may be deferred (or placed into a reserve account) until after the
payment of all or a substantial portion of the interest or principal (or both)
on senior debt obligations, or until the overcollateralization or reserve
balance reaches a specified level. As a result of its ownership of such
subordinated MBS Interests, the Company would recognize interest income but
could receive no cash. Although the Company may benefit from tax deductions
(such as interest and depreciation) from its investments and borrowings, it is
unlikely that such tax benefits would be sufficient to offset completely the
phantom income realized by the Company from OID and its investment in
subordinated MBS Interests. Accordingly, to satisfy the REIT distribution
requirement (95% of taxable income), the Company may need to borrow money,
raise additional capital or sell assets to obtain the cash needed for
distribution to its shareholders.
REMIC Residual Interests and retained interests in non-REMIC securitization
transactions also may generate taxable income in excess of cash flow in any
year. In addition, certain taxable income produced by a REMIC Residual
Interest ("Excess Inclusion") may cause ICCMIC's stockholders to suffer
certain adverse tax consequences. See "Federal Income Tax Considerations."
Consequently, an acquisition by the Company of debt obligations that are
deemed to have OID or REMIC Residual Interests, or the retention of interests
in connection with non-REMIC securitization transactions, could have the
effect of requiring the Company to incur borrowings or to liquidate a portion
of its portfolio under circumstances that the Company regards as unfavorable
to meet the REIT distribution requirement.
In addition, in order to qualify as a REIT, the Company must satisfy certain
requirements concerning the nature of its assets and income, which may
restrict the Company's ability to invest in various types of assets. See
"Federal Income Tax Considerations--Requirements for Qualification--Asset
Tests." Without limiting the generality of the foregoing, the Company will not
be able to acquire securities (other than securities which are treated as an
interest in real property) of any single issuer which would represent either
more than 5% of the total value of the Company's assets or 10% of the voting
securities of such issuer. In addition, in order to satisfy the income
requirements of a REIT, the Company will generally be restricted to acquiring
assets which generate qualifying income for purposes of certain income tests.
See "Federal Income Tax Considerations--Requirements for Qualification--Income
Tests." These restrictions could impact the Company's ability to alter its
portfolio of assets.
Special rules apply to the distribution of capital gains realized by a REIT.
See "Federal Income Tax Considerations--Requirements for Qualification--
Distribution Requirements." The Company may acquire at less than their face
amount Mortgage Loans, MBS Interests and other debt obligations that are
deemed to have market discount for federal income tax purposes, which
generally is equal to the excess of an obligation's redemption price over the
holder's basis in the obligation at the time of acquisition. All or a portion
of the gain recognized by the Company from the disposition of, or principal
payments on, an obligation which has market discount would be treated as
ordinary income and not capital gain, so that the Company would be required to
make a distribution to its shareholders in order to satisfy the requirement
that a REIT distribute 95% of its taxable income to its shareholders each
taxable year.
If a Mortgage Loan, MBS Interest or other debt obligation with market
discount is held by a REMIC in which the Company acquires a REMIC Residual
Interest, a portion of the market discount would be recognized as income each
year by the REMIC and, hence, the Company. As a result, the market discount on
obligations
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held by a REMIC in which the Company holds a REMIC Residual Interest could
increase the annual distribution requirement.
PLANS SHOULD CONSIDER ERISA RISKS OF INVESTING IN COMMON STOCK. The Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and section 4975
of the Code prohibit certain transactions that involve (i) certain pension,
profit-sharing, employee benefit, or retirement plans or individual retirement
accounts (each a "Plan") and (ii) the assets of a Plan. A "party in interest"
or "disqualified person" with respect to a Plan will be subject to (x) an
initial 10% excise tax on the amount involved in any prohibited transaction
involving the assets of the Plan and (y) an excise tax equal to 100% of the
amount involved if any prohibited transaction is not corrected. Consequently,
the fiduciary of a Plan contemplating an investment in the Common Stock should
consider whether the Company, any other person associated with the issuance of
the Common Stock, or any affiliate of the foregoing is or might become a
"party in interest" or "disqualified person" with respect to the Plan. In such
a case, the acquisition or holding of Common Stock by or on behalf of the Plan
could be considered to give rise to a prohibited transaction under ERISA and
the Code. See "ERISA Considerations--Employee Benefit Plans, Tax Qualified
Retirement Plans, and IRAs."
OWNERSHIP LIMITATION MAY RESTRICT BUSINESS COMBINATION OPPORTUNITIES. In
order for the Company to maintain its qualification as a REIT, not more than
50% in value of its outstanding shares of capital stock may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to include
certain entities). For the purpose of preserving its REIT qualification, the
Company's Charter generally prohibits direct or indirect ownership of more
than 9.9% of the number of outstanding shares of Common Stock or any series of
preferred stock (the "Ownership Limitation"). The Ownership Limitation could
have the effect of discouraging a takeover or other transaction in which
holders of some, or a majority, of the shares of Common Stock might receive a
premium for their shares of Common Stock over the then prevailing market price
or which such holders might believe to be otherwise in their best interests.
See "Description of Capital Stock--Restrictions on Transfer" and "Federal
Income Tax Considerations--Requirements for Qualification."
PREFERRED STOCK MAY PREVENT CHANGE IN CONTROL. The Charter authorizes the
Board of Directors to classify and reclassify unissued capital stock into
shares of preferred stock of one or more series and to establish the
preferences and rights of any shares of preferred stock issued. Although the
Company has no current intention to issue any series of preferred stock in the
foreseeable future, the issuance of any series of preferred stock could have
the effect of delaying or preventing a change in control of the Company even
if a majority of the Company's Common Stockholders believed such change of
control was in their best interest. See "Description of Capital Stock--
Preferred Stock."
MARYLAND ANTI-TAKEOVER STATUTES MAY RESTRICT BUSINESS COMBINATION
OPPORTUNITIES. As a Maryland corporation, ICCMIC is subject to various
provisions of Maryland law, which impose certain restrictions and require
certain procedures with respect to certain stock purchases and business
combinations. See "Certain Provisions of Maryland Law and of ICCMIC's Charter
and Bylaws--Business Combinations" and "--Control Share Acquisitions."
BOARD OF DIRECTORS MAY CHANGE CERTAIN POLICIES WITHOUT STOCKHOLDER
CONSENT. The major policies of the Company, including its investment policy
and other policies with respect to acquisitions, financing, growth,
operations, debt and distributions, are determined by its Board of Directors.
The Board of Directors, and in certain cases, the Independent Directors, may
amend or revise these and other policies, or approve transactions that deviate
from these policies, from time to time without a vote of the Common
Stockholders. The effect of any such changes may be positive or negative. The
Company cannot change its policy of seeking to maintain its qualification as a
REIT without the affirmative vote of two-thirds of all of the votes ordinarily
entitled to be cast in the election of directors, voting together as a single
class. See "Operating Policies and Objectives" and "Certain Provisions of
Maryland Law and of ICCMIC's Charter and Bylaws."
LOSS OF INVESTMENT COMPANY ACT EXEMPTION WOULD AFFECT THE COMPANY
ADVERSELY. The Company believes that it will not be, and intends to conduct
its operations so as not to become, regulated as an investment
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company under the Investment Company Act. The Investment Company Act exempts
entities that, directly or through majority-owned subsidiaries, are "primarily
engaged in the business of purchasing or otherwise acquiring mortgages and
other liens on and interests in real estate" ("Qualifying Interests"). Under
current interpretations by the Staff of the Securities and Exchange Commission
(the "Commission"), in order to qualify for this exemption, the Company, among
other things, must maintain at least 55% of its assets in Qualifying Interests
and also may be required to maintain an additional 25% in Qualifying Interests
or other assets related to real estate. The assets that the Company may
acquire therefore may be limited by the provisions of the Investment Company
Act. In connection with its acquisition of MBS Interests, the Company will
seek, where appropriate, to obtain foreclosure rights by obtaining the Special
Servicing rights with respect to the underlying mortgage loans, although there
can be no assurance that it will be able to do so on acceptable terms. If the
Company does not obtain such rights, the related MBS Interests will not
constitute Qualifying Interests (but the Company believes they would
constitute other assets related to real estate) for the purpose of the
Investment Company Act. If the Company obtains such rights, the Company
believes that the related MBS Interests will constitute Qualifying Interests
for the purpose of the Investment Company Act. The Company does not intend,
however, to seek an exemptive order, no-action letter or other form of
interpretive guidance from the Commission or its Staff on this position. If
the Commission or its staff were to take a different position with respect to
whether such MBS Interests constitute Qualifying Interests, the Company could,
among other things, be required either (a) to change the manner in which it
conducts its operations to avoid being required to register as an investment
company under the Investment Company Act or (b) to register as an investment
company, either of which could have an adverse effect on the Company and the
market price for the Common Stock.
LIMITATION ON LIABILITY OF MANAGER AND OFFICERS AND DIRECTORS OF THE
COMPANY. Maryland law permits a Maryland corporation to include in its charter
a provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. ICCMIC's Charter
contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law. See "The Company--Directors and Executive
Officers."
The Company will indemnify the Manager and its officers and directors from
any action or claim brought or asserted by any party by reason of any
allegation that the Manager or one or more of its officers or directors is
otherwise accountable or liable for the debts or obligations of the Company or
its affiliates. In addition, the Manager and its officers and directors will
not be liable to the Company, and the Company will indemnify the Manager and
its officers and directors, for acts performed pursuant to the Management
Agreement, except for claims arising from acts constituting bad faith, willful
misconduct, gross negligence or reckless disregard of their duties under the
Management Agreement. See "Management of Operations--Limits of
Responsibility." In addition, ICCMIC will indemnify, hold harmless and pay
reasonable expenses in advance of final disposition of a proceeding to,
present or former directors and officers and certain other parties to the
fullest extent permitted from time to time by Maryland Law. See "The Company."
OTHER RISKS
CONFLICTS OF INTEREST IN THE BUSINESS OF THE COMPANY. The Company will be
subject to various potential conflicts of interest arising from its
relationship with the Manager and its affiliates. With a view toward
protecting the interests of the Company's stockholders, the Charter of the
Company provides that a majority of the Board of Directors must be
unaffiliated with the Manager (the "Independent Directors").
To be effective, the execution of the Management Agreement must be approved
by a majority of the Independent Directors. Moreover, the renewal of the
Management Agreement after the initial two year term will require the
affirmative vote of a majority of the Independent Directors, and a majority of
the Independent Directors may terminate the Management Agreement at any time
after two years upon 60 days' notice and payment of a termination fee. See
"Management of Operations--The Management Agreement." The compensation
provisions of the Management Agreement are intended to provide an incentive
for the Manager
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and its personnel to seek to maximize stockholder value by tying the Manager's
incentive compensation to Funds From Operations per share (before the
incentive fee and after adjustment for gains and losses from debt
restructuring and sales of properties). See "Management of Operations--
Management Fees." Funds From Operations, as defined by the National
Association of Real Estate Investment Trusts ("NAREIT"), means net income
computed in accordance with generally accepted accounting principles ("GAAP")
excluding gains (or losses) from debt restructuring and sales of property,
plus depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. Funds From
Operations does not represent cash generated from operating activities in
accordance with GAAP and should not be considered as an alternative to net
income as an indication of the Company's performance or to cash flows as a
measure of liquidity or ability to make distributions.
Although the Independent Directors will approve the Management Agreement,
daily operations between the Company and the Manager and its affiliates will
not be required to be approved by a majority of the Company's Independent
Directors. Instead, a majority of the Independent Directors will approve
general guidelines ("Guidelines") for the Company's investments, borrowings
and operations. On a quarterly basis, the Independent Directors will review
transactions engaged in by the Company to monitor compliance with the
Guidelines. Moreover, the Independent Directors will review the Guidelines and
the Company's investment policies annually. Investors should be aware that, in
conducting this review, the Independent Directors will rely primarily on
information provided to them by the Manager.
In deciding whether to approve an acquisition of Mortgage Loans and other
assets from Imperial Credit or its affiliates, the Manager may consider such
information as it deems appropriate to determine whether the investment is
consistent with the Guidelines, whether the price is fair and whether the
investment otherwise is fair and in the best interest of the Company. To
determine whether the price of a Mortgage Loan or MBS Interest is fair, the
Company may consider a number of factors, including market conditions
(including market interest rates, the availability of mortgage credit and
economic, demographic, geographic, tax, legal and other factors), the yield to
maturity of the relevant asset, the liquidity of the Mortgage Loan or MBS
Interest, the limitations on the obligations of the seller with respect to the
Mortgage Loan or MBS Interest being acquired, the rate and timing of payments
to be made with respect to the Mortgage Loan or MBS Interest, the Mortgaged
Property underlying the Mortgage Loan or Mortgage Collateral underlying the
MBS Interest, the risk of adverse fluctuations in the market values of that
Mortgaged Property or Mortgage Collateral as a result of economic events or
governmental regulations, the historical performance and other attributes of
the property manager responsible for managing that Mortgage Collateral,
relevant laws limiting actions that may be taken with respect to loans secured
by Real Property and limitations on recourse against the obligors following
realization on the collateral through various means, risks of timing with
respect to mortgage prepayments, risks associated with geographic
concentration of underlying assets constituting the Mortgaged Property or
Mortgage Collateral for the relevant Mortgage Loan or MBS Interest,
environmental risks, pending and threatened litigation, junior liens and other
issues relating to title, a prior history of defaults by affiliated parties on
similar and dissimilar obligations, and other factors. In approving the
acquisition of a Mortgage Loan or MBS Interest, the Manager will consider data
such as that presented in the tables contained in Annexes A, B, and C attached
hereto." To determine whether the price of a Distressed Real Property is fair,
the Manager may consider a number of other factors, which may include an
appraisal by an MAI appraiser who is certified or licensed in the state and
whose compensation is not dependent on the transaction. The Independent
Directors are likely to rely substantially on information and analysis
provided by the Manager to evaluate the Company's Guidelines, compliance
therewith and other matters relating to the Company's investments.
The Company has contracted (subject to the consent of the Independent
Directors) with Imperial Credit and SPTL to purchase certain specified
Mortgage Loans and MBS Interests, constituting the Initial Investments, soon
after the Closing for an aggregate purchase price of approximately $206
million plus accrued interest. See "Initial Investments." Imperial Credit and
SPTL will realize a book gain as a result of this sale, subject to the terms
of the definitive agreement to purchase the Initial Investments, satisfaction
of the GAAP sale criteria, and consummation of the transaction. The
Independent Directors will be asked to approve this transaction and the
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price to be paid by the Company prior to the Closing. In their review of the
proposed transaction and price, the Independent Directors are expected to
consider the historical information presented under "Initial Investments" and,
with respect to the MBS Interests, the data concerning projected yields set
forth under "Yield Considerations Related to the Initial Investments."
The price at which the Company will purchase Mortgage Loans and other assets
from Imperial Credit and its affiliates, including SPTL, will be determined in
accordance with the Guidelines, as amended from time to time. A majority of
the Independent Directors will be required to approve the transfer price of
the Initial Investments in advance. In the future, the Manager will determine
the transfer price for the Company's acquisitions of assets from Imperial
Credit and its affiliates based on pricing guidelines approved by the
Independent Directors. The Independent Directors would review those
transactions on a quarterly basis to insure compliance with the Company's
pricing guidelines.
Where possible, the price that the Company will pay for Mortgage Loans, MBS
Interests and other assets acquired from Imperial Credit or its affiliates
will be determined by reference to the prices most recently paid to Imperial
Credit or its affiliates for similar assets, adjusted for differences in the
terms of such transactions and for changes in market conditions between the
dates of the relevant transactions. If no previous sales of similar assets
have occured, the Company will attempt to determine a market price for the
asset by an alternative method, such as obtaining a broker's price opinion or
an appraisal, if it can do so at a reasonable cost. Investors should
understand, however, that such determinations are estimates and are not bona
fide third party offers to buy or sell. Investors should carefully and
independently consider the information set forth under "Initial Investments"
and "Yield Considerations Related to Initial Investments," including the
assumptions and scenarios described therein.
It is the intention of the Company, Imperial Credit, SPTL and their
respective affiliates that the agreements and transactions, including the sale
of Mortgage Loans, MBS Interests, Real Property and Non Real Estate Assets,
taken as a whole, between the Company on the one hand and Imperial Credit,
SPTL and their affiliates on the other hand are fair to both parties. However,
there can be no assurance that each of such agreements and transactions will
be on terms at least as favorable to the Company as could have been obtained
from unaffiliated third parties.
The Company anticipates that the price it pays for assets acquired from
Imperial Credit or its affiliates may, in certain cases, be lower than the
price that a third party would pay for those assets if economic benefits would
inure to Imperial Credit and its affiliates by selling to the Company, rather
than a third party. For example, Imperial Credit and its affiliates generally
would not incur any broker's fees in connection with a sale of Mortgage Loans
and MBS Interests to the Company. In addition, if Imperial Credit and its
affiliates engage in repetitive sales of assets to the Company, the purchase
and sale agreement used in the successive transactions is likely to contain
standard terms and conditions that previously will have been negotiated by the
parties, resulting in reduced legal costs.
The Management Agreement does not limit or restrict the right of the Manager
or any of its officers, directors, employees or affiliates from engaging in
any business or rendering services of any kind to any other person, except
that the Manager may not manage or advise another REIT or other entity that
invests or intends to invest primarily in commercial and multifamily Mortgage
Loans or subordinated CMBS Interests. Moreover, the directors and certain of
the executive officers of the Manager will execute non-compete agreements that
will preclude them from leaving the Manager and, under certain circumstances,
forming or joining another REIT that invests or intends to invest primarily in
commercial and multifamily Mortgage Loans or subordinated CMBS Interests.
Imperial Credit and its affiliates, including SPTL, expect to continue to
originate Mortgage Loans and MBS Interests. SPTL will enter into an agreement
granting the Company, as long as the Management Agreement is in effect, a
right of first offer to purchase, in addition to the Initial Investments, not
less than $150 million annually
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of multifamily and commercial Mortgage Loans typical of those originated by
SPTL. Although not contractually committed to do so, the Company intends to
purchase Mortgage Loans offered to it pursuant to the foregoing right of first
offer, subject to compliance with the Guidelines and underwriting criteria as
modified from time to time.
The Company expects to maintain a relationship with Imperial Credit and SPTL
in which the Company will be a ready, willing and able purchaser of MBS
Interests that may be sold from time to time by SPTL. Although no binding
commitment will exist on the part of Imperial Credit, SPTL or the Company
regarding the sale and purchase of MBS Interests, the Company expects to be
able to purchase MBS Interests from SPTL at prices and on terms meeting the
Company's investment criteria. The Company expects that Imperial Credit and
SPTL will offer to sell assets to the Company on terms and at prices that, in
the aggregate, will be fair to both parties, subject to compliance with the
Guidelines. See "Management of Operations--Certain Relationships; Conflicts of
Interests." In deciding whether to acquire any such asset, the Manager may
consider, among other factors, whether acquisition of the asset will enhance
the Company's ability to achieve or exceed the Company's risk adjusted target
rate of return established for that period by the Company's Board of
Directors, whether the asset otherwise is well-suited for the Company and
whether the Company is financially able to take advantage of the investment
opportunity. If an asset that otherwise meets all of the Company's criteria
for asset acquisition is being offered to the Company at a price that is
greater, or on terms that are less favorable, than would be required by third
parties for similar assets in bona fide arms' length transactions, the Manager
would be expected to recommend that the Company decline to acquire that asset
at the quoted price and terms, notwithstanding the relationship among the
Company, Imperial Credit and SPTL.
Imperial Credit Mortgage Holdings, Inc. ("IMH"), a residential REIT formerly
affiliated with Imperial Credit, recently formed IMH Commercial Holdings, Inc.
("ICH"), formerly known as Imperial Credit Commercial Holdings, Inc., a REIT
that intends to invest in commercial and multifamily mortgage loans and CMBS
and may compete with the Company for assets. Imperial Credit is not sponsoring
and does not own any interest in ICH. However, Joseph R. Tomkinson, the
chairman and chief executive officer of ICH, is a member of Imperial Credit's
board of directors.
EXTERNAL MANAGEMENT OF THE COMPANY. The Company will engage the Manager to
advise the Board of Directors and direct the day-to-day business affairs of
the Corporation. Thus, the Company's success may depend on the services of the
Manager and its officers and employees. In making investment decisions, the
Company will rely on the Manager's recommendations and on the Guidelines. The
Independent Directors will approve and monitor compliance with the Guidelines.
Subject to the Guidelines, the Manager is expected to have significant
latitude in the types of assets it may decide are proper investments for the
Company. No assurance can be made that the Manager's decisions in this regard
will result in a profit for the Company. Moreover, certain of the Manager's
personnel are employees of Imperial Credit or its affiliates, and accordingly
the Company's success depends in part on the continuing ability of Imperial
Credit and its affiliates, including the Manager, to hire and retain
knowledgeable personnel. This ability may be affected, in turn, by Imperial
Credit's continued financial strength. Finally, the Company is subject to the
risk that the Manager will terminate the Management Agreement and that no
suitable replacement can be found to manage the Company.
REGULATION OF MANAGER'S AFFILIATES. The Manager is a wholly-owned subsidiary
of Imperial Credit, a company that conducts most of its operations through
numerous subsidiaries and other entities in which Imperial Credit owns a
significant interest. Certain of these subsidiaries and entities are subject
to extensive government supervision and regulation, intended primarily for the
protection of depositors and other third parties. In addition, each of
Imperial Credit and its affiliates is subject to changes in federal and state
laws, including changes in tax laws that could materially affect the real
estate industry, as well as changes in regulations, governmental policies and
accounting principles. Such changes may increase the costs of doing business
for Imperial Credit and its affiliates and assist their competitors. Any such
added burdens may affect adversely the Manager's ability to carry out its
management functions.
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NEWLY ORGANIZED CORPORATION. The Company was organized on July 31, 1997. It
has no operating history and has not implemented its operating policies and
strategies. The Company will be dependent upon the experience and expertise of
the Manager in advising the Company and administering its day-to-day
operations. Certain officers, directors and employees of the Company and the
Manager and its affiliates have experience in creating, evaluating, acquiring
and managing Mortgage Loans and MBS Interests. However, such officers,
directors and employees have never managed a REIT. Moreover, the Manager, a
newly organized company, currently is developing internal computer analytic
programs for use in analyzing MBS Interests. Until those programs are fully
developed, the Manager will contract with third party experts to perform such
analytics. There can be no assurance that the Company and the Manager will be
able to implement successfully the strategies that the Company intends to
pursue.
RISK THAT MARKET FOR COMMON STOCK WILL NOT DEVELOP. Prior to this offering,
there has not been a public market for the shares of Common Stock offered
hereby. The initial public offering price will be determined by the Company
and representatives of the Underwriters. There can be no assurance that the
price at which the shares of Common Stock will sell in the public market after
the offering will not be lower than the price at which they are sold by the
Underwriter. The Common Stock has been approved for listing on The Nasdaq
Stock Market. Quotation through The Nasdaq Stock Market does not insure,
however, that an active market will develop for the Company's Common Stock.
POSSIBLE CHANGES IN PRICE OF COMMON STOCK DUE TO CHANGES IN YIELDS. The
Company's earnings will be derived primarily from the expected positive spread
between the yield on the Company's Real Estate Related Assets and the costs to
the Company of its borrowings. This expected positive spread will not
necessarily be larger in high interest rate environments than in low interest
rate environments. In periods of high interest rates, however, the net income
of the Company, and therefore the dividend yield on the Common Stock, may be
less attractive compared to alternative investments of equal or lower risk,
which could impact adversely the price of the Common Stock.
FUTURE OFFERINGS OF CAPITAL STOCK. The Company may increase its capital
resources in the future by making additional offerings of its Common Stock,
securities convertible into its Common Stock or preferred stock. The actual or
perceived effect of such offerings may be the dilution of the book value or
earnings per share of the Common Stock outstanding, which may result in the
reduction of the market price of the Common Stock.
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OPERATING POLICIES AND OBJECTIVES
STRATEGY
The Company intends to invest primarily in (i) multifamily and commercial
Term Loans, and (ii) multifamily and commercial MBS. The Company's MBS
Interests may include various classes of collateralized mortgage obligations
("CMOs") and pass-through certificates ("Pass-Through Certificates"),
consisting primarily of non-investment grade (including subordinated, Sub IO
and PO) classes and investment grade IO and Inverse IO classes. The Company
also may invest in Distressed Mortgage Loans, Construction Loans and Mezzanine
Loans, and RMBS. In addition, the Company may acquire Real Property and Non
Real Estate Related Assets. The Initial Investments will consist of
approximately $136 million of Mortgage Loans and $60 million of MBS Interests.
The Company intends to borrow funds through the issuance of CMOs in debt
securitizations or other borrowing arrangements, pledging its assets
(including Mortgage Loans and MBS Interests) as collateral security for its
repayment obligations. The Company also may, in certain cases, securitize
Mortgage Loans by transferring them to a special purpose trust or corporation
which elects to be treated as a REMIC or a financial asset securitization
investment trust ("FASIT"). The special purpose entity would issue Pass-
Through Certificates to the Company, which would sell certain classes and
retain certain non-investment grade and IO classes. The Company intends to use
the proceeds from securitizations and borrowings to invest in additional
Mortgage Loans MBS Interests and other assets and, in turn, to borrow against
those newly acquired assets, primarily through additional securitizations. The
Company's strategy is to repeat this process to the extent opportunities to
use leverage are available and the Manager determines and advises that using
leverage is prudent and consistent with maintaining unacceptable level of risk
until the Company has significantly leveraged its portfolio of Mortgage Loans
and MBS Interests. There can be no assurances that the Company will be able to
acquire appropriate assets other than the Initial Investments, that the terms
or results of the Company's acquisitions will be beneficial to it, or that the
Company will achieve its objectives. See "Risk Factors."
In addition, the Company may decide to pursue other strategies and other
available acquisition opportunities it deems suitable for the Company's
portfolio. The Company also may acquire Real Property, including Distressed
Real Property, and Non Real Estate Assets.
The Company's selection of assets may be dependent on market factors that
will change from time to time, and thus the Company cannot anticipate with any
certainty the percentage of its assets that will be invested in each category
of Real Estate Related Assets, except that the Company does not anticipate
investing more than 20% of its assets in foreign Real Property and foreign
Mortgage Loans. Subject to the Guidelines, and to the acquisition of the
Initial Investments, the Company has a great deal of discretion as to the
manner in which it may invest its assets, including future borrowings. There
can be no assurance that the Company will be successful in its investment
strategy.
The Company will have no predetermined limitations or targets for
concentration of property type or geographic location. Instead, the Company
plans to make acquisition decisions through asset and collateral analysis,
evaluating investment risks and potential rewards on a case-by-case basis.
However, because SPTL will be the Company's primary source of assets, and most
of SPTL's Mortgage Loans are secured by Mortgage Properties in California, the
return on an investment in the Common Stock will be dependent on the economy
of California. See "Risk Factors--Risks Related to Investments in Mortgage
Loans--Geographic Concentration in California."
The Company will acquire all of the Initial Investments from Imperial Credit
and SPTL, and in the future may acquire additional assets from Imperial Credit
and its affiliates. SPTL has granted the Company a right of first offer on
$150 million Mortgage Loans per year typical of those originated by SPTL for
as long as the Management Agreement is in place. The Company intends to
acquire assets, other than the Initial Investments,
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from various sources unaffiliated with Imperial Credit located throughout the
United States, such as savings and loan associations, banks, mortgage bankers,
home builders, insurance companies and other mortgage lenders.
If the Company decides to acquire assets from a prospective seller or other
transferor that would realize significant gain on the sale or other
disposition of those assets, the Company may, in an attempt to make a transfer
of those assets to the Company a more attractive disposition alternative to
the prospective transferor, establish a limited partnership (the "Operating
Partnership") to which the prospective transferor could contribute those
assets. Both the general partner and initial limited partner of the Operating
Partnership would be wholly-owned qualified REIT subsidiaries of ICCMIC. In
exchange for the contribution of those appreciated assets sought by the
Company, the prospective transferor would receive units of ownership in the
Operating Partnership as a limited partner therein. Those units would be
convertible, at the election of their owner, into cash or shares of Common
Stock of the Company on a "one for one" basis. The number of such units in the
Operating Partnership to be issued to the prospective transferor in exchange
for its contribution of the assets desired by the Company would be determined
by the Manager based on its analysis of the value of those assets (that is,
such analysis would be performed in substantially the same manner as if the
Company were considering a purchase of those assets for cash).
IMPERIAL CREDIT'S EXPERIENCE
GENERAL. Imperial Credit is a California corporation, organized in 1986. It
is a diversified commercial and consumer finance company engaged, primarily
through its subsidiaries and affiliates, in a variety of lending activities.
Subsidiaries and other entities in which Imperial Credit holds a significant
interest and through which it conducts most of its lending activities include,
among others, Southern Pacific Thrift & Loan Association ("SPTL"), Franchise
Mortgage Acceptance Company LLC ("FMAC"), Imperial Business Credit, Inc.
("IBC"), Southern Pacific Funding Corporation ("SPFC"), and Auto Marketing
Network, Inc. ("AMN"). At June 30, 1997, Imperial Credit and its subsidiaries
had $2.28 billion of total consolidated assets and consolidated stockholders'
equity of $264.0 million.
In 1995, Imperial Credit began to reposition its business from originating
and selling conforming residential Mortgage Loans to offering higher margin
loan and lease products. It has sought to accomplish this repositioning
through a business strategy that emphasized: (i) opportunistic expansion and
acquisitions of businesses in niche segments of the financial services
industry, (ii) conservative and disciplined underwriting and credit risk
management, (iii) loan and lease originations, where possible, on a wholesale
basis, (iv) securitization or sale in the secondary market of substantially
all of its loans and leases, other than those held by SPTL or other affiliates
for investment, and (v) maintaining business and financial flexibility to take
advantage of changing market conditions with respect to specific financial
services businesses.
Imperial Credit and its affiliates are engaged in finance activities in the
following sectors:
MULTIFAMILY AND COMMERCIAL MORTGAGE LENDING. Imperial Credit conducts its
multifamily and commercial mortgage lending operations through the Income
Property Lending Division ("IPLD") of SPTL. IPLD was formed in February 1994
to expand Imperial Credit's multifamily and commercial property lending
business. The focus of IPLD's lending activities is the small loan market
(consisting primarily of loans less than $3 million) for multifamily and
commercial properties. For the six months ended June 30, 1997 and the years
ended December 31, 1996 and 1995, IPLD loan originations totaled $148.1
million, $260.9 million and $160.0 million, respectively. The Initial
Investments include approximately $136 million of Mortgage Loans originated by
IPLD, and the Company believes that IPLD will continue to be a significant
source of Mortgage Loans for the Company. Indeed, the Mortgage Loans to be
purchased by the Company pursuant to the right of first offer with SPTL will
be originated in the IPLD division.
FRANCHISE LENDING. Franchise lending is conducted through FMAC, Imperial
Credit's 66.7% owned subsidiary, the assets of which were acquired from a
division of Greenwich Financial Capital Products Company, Inc. in June 1995.
FMAC is a full service franchise finance company which originates loans and
equipment leases
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to top-tier national and regional franchise concept operators. While FMAC
historically focused on franchise concepts such as Taco Bell, Burger King,
Hardee's, Wendy's, Pizza Hut and KFC, it currently is expanding its marketing
focus to include other food and non-food related franchise concepts. In
addition, FMAC recently established divisions to provide financing to
experienced golf course operators and retail franchisees. For the six months
ended June 30, 1997, the year ended December 31, 1996 and six months ended
December 31, 1995, FMAC originated or acquired $267.1 million, $449.3 million
and $163.5 million of franchise loans and securitized $158.6 million, $325.1
million and $105.2 million of loans respectively. The Company believes that
FMAC may be a significant source of REIT qualifying assets for the Company.
BUSINESS FINANCE AND CONSUMER LENDING. Imperial Credit has substantial
experience in business finance and consumer lending. Business finance lending
is conducted through the IBC subsidiary of Imperial Credit, which leases
business equipment including copying, data processing, communication, printing
and manufacturing equipment to business users, and three divisions of its SPTL
subsidiary: Coast Business Credit ("CBC"), an asset-based lender specializing
in lending to middle market manufacturing and high-technology businesses,
operated as a division of Coast Federal Bank until its acquisition by Imperial
Credit in September 1995, the Loan Participation and Investment Group
("LPIG"), which invests in syndicated commercial loan participations in loans
originated by commercial banks, and the Auto Lend Group ("Auto Lend"), which
finances automobile dealership inventories. Consumer lending is conducted
through the Auto Marketing Network, Inc. ("AMN") subsidiary of Imperial
Credit, which finances on a nationwide basis the purchase of new and used
automobiles primarily to sub-prime borrowers, and through the Auto Lending
Division ("ALD") and Consumer Credit Division ("CCD") of SPTL. ALD lends
primarily to credit impaired buyers of new and used automobiles, and CCD
offers loans to finance home improvements and consumer goods.
ADVISORY, INVESTMENT AND OTHER ACTIVITIES. Imperial Credit conducts advisory
services through its Imperial Credit Advisors, Inc. ("ICAI") subsidiary and
has substantial investments in Southern Pacific Funding Corporation ("SPFC"),
a publicly traded non-conforming residential mortgage lender,
Dabney/Resnick/Imperial, LLC ("DRI"), an investment banking firm, and Imperial
Credit Mortgage Holdings, Inc. ("IMH"), a publicly traded real estate
investment trust engaged in residential mortgage finance activities.
Dabney/Resnick/Imperial. In September 1996, Imperial Credit entered into
various arrangements with Dabney/Resnick, Inc., subsequently renamed
Dabney/Resnick/Imperial, LLC. DRI engages in a broad spectrum of investment
banking activities, asset management services and high yield and equity
trading. In 1993, DRI formed a real estate finance group focusing on
originating and arranging acquisition financing for a variety of real
estate assets. Since its formation, the real estate group has structured
financing for acquisitions of commercial office buildings, retail shopping
centers, golf courses, hotels, undeveloped land and real estate backed tax
exempt municipal bonds. In addition, DRI has brokered the purchase and sale
of first mortgage notes, industrial development bonds, real estate backed
tax exempt municipal bonds and co-managed the issuance of CMBS Pass-Through
Certificates. The Company believes that DRI's network of corporate finance
professionals, salespersons, brokers and traders will provide a significant
source of a variety of REIT qualifying assets that the Company could
acquire.
Southern Pacific Funding Corporation. SPFC is a publicly traded specialty
finance company (NYSE Symbol: "SFC") which originates, purchases and sells
high yielding, single family non-conforming mortgage loans. Substantially
all of SPFC's loans are secured by first or second mortgages on owner
occupied single family residences. The majority of the originated and
purchased loans are made to borrowers who do not qualify for or are
unwilling to obtain financing from conventional mortgage sources. As of
June 30, 1997, Imperial Credit owned 49.4% of the outstanding common stock
of SPFC, which is reflected on Imperial Credit's financial statements as
"Investment in Southern Pacific Funding Corporation." Imperial Credit's
investment in SPFC constituted 2.4% of Imperial Credit's total assets and
contributed 13.2% of Imperial Credit's total revenue for the six months
ended June 30, 1997.
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Imperial Credit Advisors, Inc. and Imperial Credit Mortgage Holdings,
Inc. ICAI oversees the day-to-day operations of IMH. Simultaneously with
IMH's initial public offering in November 1995, Imperial Credit contributed
certain operating assets of Imperial Credit's residential mortgage conduit
operations and SPTL's residential warehouse lending operations for 500,000
shares of IMH's common stock. IMH is a publicly traded real estate
investment trust (AMEX Symbol: "IMH") which operates three businesses: (i)
long-term investment operations, which invests primarily in nonconforming
residential mortgage loans and securities collateralized by such loans,
(ii) warehouse lending operations which provides short-term lines of credit
to originators of residential mortgage loans and (iii) conduit operations,
through its affiliate ICI Funding Corporation ("ICIFC"), which primarily
purchases and sells or securitizes non-conforming residential mortgage
loans.
IMH has formed a new investment entity, IMH Commercial Holdings, Inc.
("ICH"), to invest in Commercial Mortgage Loans and CMBS, and that entity
could compete the Company for assets that the Company may seek to acquire.
Imperial Commercial Capital Corporation, a wholly-owned subsidiary of ICH,
acts as an origination conduit for ICH. ICH originally was named Imperial
Credit Commercial Holdings, Inc., but, to avoid confusion with Imperial
Credit and its affiliates and the Company, ICH has changed its name,
eliminating "Imperial Credit" therefrom. Joseph Tomkinson, the chairman and
chief executive officer of ICH, serves on the board of directors of
Imperial Credit.
INTERNATIONAL EXPERIENCE. Imperial Credit Worldwide, Ltd. (" ICW"), a
wholly-owned subsidiary of Imperial Credit, was formed in June 1997 to seek
out and engage in lending opportunities outside the United States. ICW has
created its first subsidiary, Credito Imperial Argentino, which was formed in
July 1997 to originate multifamily home mortgage and automobile loans in
Argentina. In each country in which ICW wishes to operate, ICW anticipates
creating a local entity together with prominent local entrepreneurs who will
own a percentage interest in that entity, and to build a substantial business
by, among other things, utilizing ICW's financial, managerial and
international lending expertise. The Company believes that ICW and its
subsidiaries may be helpful to the Company in identifying and evaluating
foreign Real Properties and Mortgage Loans secured by foreign Real Properties
that the Company could acquire.
RECENT STRUCTURED FINANCE TRANSACTIONS. Imperial Credit and its affiliates
have engaged in a significant number of successful structured finance
transactions during the past year. Seven recent transactions include (a) two
CMBS transactions in which SPTL securitized approximately $500 million of
multifamily and commercial loans, (b) two transactions in which FMAC
securitized approximately $300 million of franchise mortgage loans, and (c)
one transaction in which IBC securitized approximately $100 million of leases.
The Company believes that the availability of Imperial Credit's and its
affiliates' structured finance and securitization personnel, experience and
other resources will assist the Company in sourcing, evaluating and making
investments in Mortgage Loans and MBS Interests, in borrowing against and
managing its assets (which may include Distressed Real Property), in
securitizing its portfolio of Mortgage Loans and MBS Interests, and in
exercising Special Servicing rights that it might have from time to time with
respect to the Mortgage Loans and MBS Interests in its portfolio.
Although many of the Company's prospective competitors may have access to
greater capital and have other advantages, the Company believes that the
experience of Imperial Credit and its affiliates in generating, evaluating,
acquiring, managing and securitizing Mortgage Loans, and in generating,
evaluating and acquiring MBS Interests of various types, will provide the
Company with the means to compete. No assurances can be made, however, in this
regard.
It should be noted that, in connection with a joint examination in January
1996 by the FDIC and the California Department of Corporations (the "DOC") of
SPTL, the agencies criticized SPTL in their reports of
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examination for, among other things, inadequacies in certain operational
practices, including practices in the areas of credit underwriting,
administration, affiliate transactions and internal controls. As a result of
that examination, SPTL entered into a joint memorandum of understanding with
the FDIC and the DOC. The memorandum of understanding (the "MOU") requires
SPTL to take certain measures in the areas of: (i) hiring and retention of
management, (ii) adoption of systems to monitor and control risk, (iii)
correction of certain violations of law, (iv) credit review, and (v)
enhancement of other operational policies. In the event SPTL fails to comply
with the MOU, SPTL and its affiliates, officers and directors could be subject
to various enforcement actions, including cease and desist orders, criminal
and civil penalties, removal from office, termination of deposit insurance or
the revocation of SPTL's charter. Any such enforcement action could have a
material adverse effect on SPTL or the Initial Investments. SPTL has
represented to the Company that SPTL does not believe the MOU has had or will
have a material adverse effect on SPTL. The Company does not believe that the
MOU will have a material adverse effect on the Company or its ability to
procure Mortgage Loans from SPTL. The Company understands that the FDIC and
the DOC recently conducted their annual examination of SPTL and have reported
to SPTL that it has made significant progress in these areas. The report has
not been released officially. If such agencies are not satisfied with SPTL's
progress in these areas, those agencies could consider enforcement actions
against SPTL or its affiliates, or their respective officers, directors or
employees. Enforcement could include, among other things, injunctive relief,
cease and desist orders, criminal or civil penalties, removal from office or
the revocation of SPTL's charter. The Company understands that it is SPTL's
belief that such actions would not be warranted under the circumstances.
THE COMPANY'S ASSETS
The discussion below describes the principal categories of assets that the
Company intends to acquire.
MORTGAGE LOANS FOR SECURITIZATION. The Company intends to acquire
multifamily and commercial Mortgage Loans (primarily Term Loans), to transfer
such Mortgage Loans to Imperial Credit Mortgage Securitization Corp.
("ICMSC"), a newly-formed special purpose qualified REIT subsidiary, and to
have ICMSC (or a special purpose trust or corporation formed by ICMSC) issue
CMOs secured by such Mortgage Loans or to otherwise borrow against those
Mortgage Loans. If the Company issues CMOs, the Company would retain the
equity ownership interest in the Mortgage Loans, subject to the CMO debt,
thereby creating the economic equivalent of a subordinated MBS Interest.
Losses on the Company's Mortgage Loans will depend upon a number of factors,
many of which will be beyond the control of the Company or the applicable
servicer. Among other things, the default frequency on the Mortgage Loans will
reflect broad conditions in the economy generally and Real Property
particularly, economic conditions in the local area in which the underlying
Mortgaged Property is located, the loan-to-value ratio of the Mortgage Loans,
the purposes for which the borrowers undertook the Mortgage Loans, and the
debt service coverage ratio. The loss severity on the Mortgage Loans will
depend upon many of the same factors described above, and will also be
influenced by the servicer's ability to foreclose on defaulted Mortgage Loans
and, if it is the successful bidder at the foreclosure sale, to sell the
underlying Mortgaged Property. For a discussion of certain legal issues
affecting the servicer's ability to foreclose on a Mortgage Loan, and the
legal impediments to the sale of the underlying Mortgaged Property, see
"Certain Legal Aspects of Mortgage Loans and Real Property Investments." These
legal issues may extend the time of foreclosure proceedings or may require the
expenditure of additional sums to sell the underlying Mortgaged Property, in
either case increasing the amount of loss with respect to the relevant
Mortgage Loans.
The Company intends to acquire a majority of its Mortgage Loans, other than
those included within the Initial Investments (the "Initial Mortgage Loans"),
and other Real Estate Related Assets from various sources unaffiliated with
Imperial Credit located throughout the United States. The Company may acquire
Mortgage Loans directly from originators and entities holding Mortgage Loans
originated by others. The Board of Directors of the Company has not
established any limits upon the geographic concentration or credit quality of
the Mortgage Loans to be acquired by the Company.
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The Company may acquire Mortgage Loans from failed savings and loan
associations or banks through United States government agencies. These
institutions and agencies might not provide representations against fraud and
misrepresentation, or meaningful recourse if the representations provided
should prove to be false. The Company may acquire third party insurance to the
extent that it is available for such risks. Accordingly, the Company will be
subject to a greater risk of loss on obligations purchased from these
institutions. If the Company does not choose, or is unable, to acquire such
insurance, the risk of loss will be greater and the Company will be relying
solely on the value of the collateral underlying the Mortgage Loan.
DISTRESSED MORTGAGE LOANS. The Company may acquire Nonperforming or
Subperforming Mortgage Loans secured by multifamily and commercial properties.
In general, the Company expects to foreclose on such Mortgage Loans in an
attempt to acquire title to the underlying Distressed Real Properties. See
"Certain Legal Aspects of Mortgage Loans and Real Property Investments" and
"Federal Income Tax Considerations--Requirements for Qualification--Income
Tests." The Company may acquire Mortgage Loans secured by Real Property with
known environmental problems that materially impair the value of that Real
Property, or acquire such Real Property. If so, the Company will take certain
steps to limit its liability for such environmental problems, but there are
risks associated with such an investment. The Manager has no experience in
investing in Mortgage Loans secured by environmentally distressed Real
Property, or in such environmentally distressed Real Property.
CONSTRUCTION FINANCING AND LOANS SUBJECT TO PRIOR LIENS. The Company may
take advantage of opportunities to invest in or provide Construction Loans for
multifamily or commercial Real Property, lending generally 85% to 90% of total
project costs, and taking a first lien mortgage to secure the debt. The
Company also may invest in Mezzanine Loans. Typically a Mezzanine Loan would
be secured by Real Property that also secures one or more other loans secured
by more senior liens (giving the Company a junior lien position). These
Construction Loans and Mezzanine Loans generally would provide the Company
with the right to receive a stated interest rate on the loan balance. In the
case of Mezzanine Loans, the Company also might receive a percentage of gross
revenues generated from the Real Property, and a percentage of any increase in
value of the Real Property payable upon maturity or refinancing of the loan.
MBS INTERESTS. The Company intends to acquire MBS Interests, primarily non-
investment grade classes, from various sources. MBS typically are divided into
two or more interests, sometimes called "tranches" or "classes." The senior
classes are often securities which, if rated, would have ratings ranging from
low investment grade "BBB" to higher investment grades "A", "AA" or "AAA." The
junior, subordinated classes typically would include one or more non-
investment grade classes which, if rated, would have ratings below investment
grade "BBB." Such subordinated classes also typically include an unrated
higher-yielding, credit support class (which generally is required to absorb
the first losses on the underlying mortgage loans).
MBS generally are issued either as collateralized mortgage obligations
("CMOs" or "CMO Bonds") or pass-through certificates ("Pass-Through
Certificates"). CMO Bonds are debt obligations of special purpose
corporations, owner trusts or other special purpose entities secured by
commercial mortgage loans or MBS. Pass-Through Certificates evidence interests
in trusts, the primary assets of which are mortgage loans. CMO Bonds and Pass-
Through Certificates may be issued or sponsored by private originators of, or
investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, investment banks and other entities. MBS
are not guaranteed by an entity having the credit status of a governmental
agency or instrumentality and generally are structured with one or more of the
types of credit enhancement described below. In addition, MBS may be illiquid.
See "Risk Factors--Risks Related to Investments in MBS Interests--Credit Risks
from Ownership of Subordinated MBS Interests."
In most mortgage loan securitizations, a series of MBS Interests is issued
in multiple classes in order to obtain investment-grade credit ratings for the
senior classes and thus increase their marketability. Each class of MBS may be
issued with a specific fixed or variable coupon rate and has a stated maturity
or final scheduled distribution date. Principal prepayments on the mortgage
loans comprising the Mortgage Collateral may cause
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the MBS to be retired substantially earlier than their stated maturities or
final scheduled distribution dates, although, with respect to commercial
mortgage loans, there generally are penalties for or limitations on the
ability of the borrower to prepay the loan. Interest is paid or accrued on MBS
on a periodic basis, typically monthly.
The credit quality of MBS depends on the credit quality of the underlying
Mortgage Collateral. Among the factors determining the credit quality of the
Mortgage Collateral will be the ratio of the mortgage loan balances to the
value of the properties securing the mortgage loans, the purpose of the
mortgage loans (e.g., refinancing or new purchase), the amount of the mortgage
loans, their terms, the geographic diversification of the location of the
properties securing the mortgage loans, and, in the case of commercial
mortgage loans, the credit-worthiness of tenants.
The principal of and interest on the underlying mortgage loans may be
allocated among the several classes of a MBS in many ways, and the credit
quality of a particular class results primarily from the order and timing of
the receipt of cash flow generated from the underlying mortgage loans.
Subordinated interests in MBS carry significant credit risks. Typically, in a
"senior-subordinated" structure, the subordinated interests provide credit
protection to the senior classes by absorbing losses from loan defaults or
foreclosures before such losses are allocated to senior classes. As long as
the more senior classes of securities are outstanding, all prepayments on the
mortgage loans generally are paid to those senior classes, at least until the
end of a lock-out period, which typically is five years or more. In some
instances, particularly with respect to subordinated interests in commercial
mortgage securitizations, the holders of subordinated interests are not
entitled to receive scheduled payments of principal until the more senior
classes are paid in full or until the end of a lock-out period. Because of
this structuring of the cash flows from the underlying mortgage loans,
subordinated interests in a typical securitization are subject to a
substantially greater risk of non-payment than are those more senior classes.
Accordingly, the subordinated interests are assigned lower credit ratings, or
no ratings at all. Neither the subordinated interests nor the underlying
mortgage loans are guaranteed by agencies or instrumentalities of the U.S.
government or by other governmental entities and accordingly are subject,
among other things, to credit risks. See "Risk Factors--Risks Related to
Investments in MBS Interests--Credit Risks from Ownership of Subordinated MBS
Interests."
As a result of the typical "senior-subordinated" structure, the subordinated
classes of MBS Interests will be extremely sensitive to losses on the
underlying mortgage loans. For example, if the Company owns a $10 million
first loss subordinated class of MBS consisting of $100 million of underlying
mortgage loans, a 7% loss on the underlying mortgage loans generally will
result in a 70% loss of the stated principal amount of the subordinated
interest. Accordingly, the holder of the subordinated interest is particularly
interested in minimizing the loss frequency (the percentage of the loan
balances that default over the life of the Mortgage Collateral) and the loss
severity (the amount of loss on defaulted mortgage loans, i.e., the principal
amount of the mortgage loan unrecovered after applying any recovery to the
expenses of foreclosure and accrued interest) on the underlying mortgage
loans.
Losses on the Mortgage Collateral underlying the Company's MBS Interests
will depend upon a number of factors, many of which will be beyond the control
of the Company or the applicable servicer. Among other things, the default
frequency on the Mortgage Collateral will reflect broad conditions in the
economy generally and Real Property particularly, economic conditions in the
local area in which the underlying Mortgaged Property is located, the loan-to-
value ratio of the Mortgage Loan, the purpose of the loan, and the debt
service coverage ratio (with respect to commercial Mortgage Loans). The loss
severity on the Mortgage Collateral will depend upon many of the same factors
described above, and will also be influenced by certain legal aspects of
mortgage loans that underlie the MBS Interests acquired by the Company,
including the servicer's ability to foreclose on the defaulted Mortgage Loan
and sell the underlying Mortgaged Property. For a discussion of certain legal
issues affecting mortgage loans and the servicer's ability to foreclose on a
Mortgage Loan, and the legal impediments to the sale of the underlying
Mortgaged Property, see "Certain Legal Aspects of Mortgage Loans and Real
Property Investments." These legal issues may extend the time of foreclosure
proceedings or may require the expenditure of additional sums to sell the
underlying Mortgaged Property, in either case increasing the amount of loss
with respect to the Mortgage Loans.
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The Company may invest in IOs, which are entitled to no (or only nominal)
payments of principal, but only to payments of interest. The holder of an IO
may be entitled to receive a stated rate of interest on a notional principal
balance equal to all or a portion of the principal balance of the Mortgage
Collateral, or that portion of the interest received that is in excess of a
certain stated rate or received by one or more classes of that MBS (for
example, where the Mortgage Collateral, or portion thereof, carries an 8.5%
interest rate after servicing costs, and the holders of the other classes are
entitled to receive 8.0% interest, leaving 0.5% on the notional principal
balance for the holder of the IO). Alternatively, the holder of an IO may be
entitled to a variable rate of interest on a nominal principal balance that
adjusts based upon adjustment in the interest rate of the underlying Mortgage
Collateral.
Because IOs often pay at a relatively small rate of interest on a large
notional principal balance, an accelerated reduction of that principal balance
will have an adverse effect on the anticipated yield to maturity of such IO.
Accordingly, if the underlying Mortgage Collateral prepays (including
prepayments as a result of default and repurchases by the seller) at a rate
faster than anticipated, the weighted average life of the IO will be reduced,
and the yield to maturity adversely affected. Conversely, if the underlying
Mortgage Collateral prepays at a rate slower than anticipated, the weighted
average life of the IO will be extended, with the consequent positive effect
on the anticipated yield to maturity.
The Company may invest in Inverse IOs, which bear interest at a floating
rate that varies inversely with (and often at a multiple of) changes in a
specified index. The yield to maturity of a class of Inverse IOs is not only
very sensitive to the rate of prepayments on the underlying Mortgage
Collateral, but also changes in the related index.
The Company may acquire subordinated IOs, known as Sub IOs, which are
entitled to no payments of principal; moreover, interest on a Sub IO often is
withheld in a reserve fund or spread account and is used to fund required
payments of principal and interest on the more senior classes. Once the
balance in the reserve fund or spread account reaches a certain level,
interest on the Sub IO is paid to the holders of the Sub IO. Sub IOs provide
credit support to the more senior classes, and thus bear substantial credit
risks. Moreover, because a Sub IO receives only interest payments, its yield
is extremely sensitive to changes in the weighted average life of the class,
which in turn is dictated by the rate of prepayments (including those
resulting from default) on the underlying loans. See "Risk Factors--Risks
Related to Investments in MBS Interests--Prepayment and Interest Rate Risks
Related to Subordinated MBS Interests, IOs and POs." Some Sub IOs are
designated as REMIC Residual Interests. Such a Sub IO typically generates
Excess Inclusion or other forms of phantom income. See "Federal Income Tax
Considerations--Requirements for Qualification--Income Tests," and "--
Distribution Requirements."
Before acquiring MBS Interests, the Company anticipates that a number of due
diligence and analysis tasks will be performed to evaluate the investment and
to verify the information and documentation provided by the seller. Such due
diligence and analysis tasks may include seeking opinions of value from
persons that the Manager deems knowledgeable, as well as a review and analysis
of such other information, tests and studies as the Manager deems appropriate
under the circumstances to determine the suitability and value of the
prospective investment. See "Yield Considerations Related to the Company's
Investments" and "Risk Factors--Risks Related to Investments in MBS
Interests--Prepayment and Interest Rate Risks Related to Subordinated MBS
Interests, IOs and POs."
Determining value is a subjective process, requiring, ultimately, a business
judgment. In making this determination, the Manager often will evaluate some
of the following characteristics of the MBS: (i) the type and quality of the
underlying collateral ("A," "B," "C" or "D" quality multifamily, commercial,
office, hotel, industrial, retail or single family residential Mortgage
Collateral); (ii) the payment status of the underlying mortgage (performing,
non-performing or sub-performing); (iii) the actual mortgage prepayment and
default history; (iv) the ratio of the unpaid mortgage balance to the current
property value; (v) the current income and cash flows generated by multifamily
and commercial real estate as compared to the debt service requirements and
(vi) the region of the country and conditions in the real estate marketplace
in which the Mortgage Collateral
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is concentrated. However, which of these characteristics (if any) are
important and how important each characteristic may be to the evaluation of a
particular MBS Interest depends on the individual circumstances. Because there
are so many characteristics to consider, each MBS Interest must be analyzed
individually, taking into consideration both objective data as well as
subjective analysis.
The Company may acquire Special Servicing rights with respect to certain of
the Mortgage Collateral underlying MBS Interests acquired by the Company. Such
Special Servicing rights would give the Company, among other things, some
control over the timing of foreclosures on the Mortgage Collateral and, thus,
may enable the Company to reduce losses on such MBS Interests. No assurances
can be made, however, that the Company will be able to acquire such Special
Servicing rights or that losses will not exceed the Company's expectations.
Although the Company's strategy is to acquire various classes of MBS Interests
at a price intended to return the Company's investment and generate a profit
thereon, there can be no assurance that such goal will be met or, indeed, that
the Company's investment in those classes of MBS Interests will be returned in
full or at all. See "Risk Factors--Risks Related to Investments in MBS
Interests" and "--Economic and Business Risks."
If the Company acquires Special Servicing rights, the Company will
subcontract with an entity in the business of providing special servicing on
commercial and multifamily mortgage loans and rated above average or better as
a special servicer by Standard & Poors Ratings Services, Fitch Investors
Service, L.P., Duff & Phelps Credit Rating Co. or Moody's Investors Service to
perform the special servicing functions. One such special servicer is Midland
Loan Services, L.P., which is the special servicer of the Mortgage Collateral
underlying the Initial MBS Investments. The Company may benefit in certain
cases from the ability to direct certain of the Special Servicing activities,
but does not expect to benefit in a material way from receipt of material
amounts of Special Servicing fees. See "Servicing of Mortgage Loans--Special
Servicing."
Many of the MBS Interests to be acquired by the Company will not have been
registered under the Securities Act, but instead initially will have been sold
in private placements. Because MBS Interests acquired in private placements
have not been registered under the Securities Act, they will be subject to
certain restrictions on resale and, accordingly, will have substantially more
limited marketability and liquidity.
Many issuers of multi-class MBS are special purpose trusts or corporations,
which elect to be treated, for federal income tax purposes, as REMICs. The
Company may acquire not only MBS Interests that are treated as regular
interests in REMICs, but also those that are designated as REMIC Residual
Interests. The Company also may acquire Non-REMIC Residual Interests. Regular
interests in a REMIC are treated as debt for tax purposes. Unlike regular
interests in REMICs, REMIC Residual Interests typically generate Excess
Inclusion or other forms of taxable income (including the accretion of market
discount) that bear no relationship to the actual economic income that is
generated by a REMIC. Non-REMIC Residual Interests also typically generate
taxable income in excess of cash receipts. Consequently, if an MBS Interest
that is designated as a REMIC or Non-REMIC Residual Interest generates a
significant amount of phantom income in any taxable year, the Company could be
required to borrow funds, to issue capital stock or to liquidate assets in
order to meet the REIT distribution requirement for such taxable year.
Subordinated MBS Interests generally are issued at a significant discount to
their outstanding principal balance, which gives rise to OID for federal
income tax purposes. The Company will be required to accrue the OID as taxable
income over the life of the related subordinated MBS Interest on a level-yield
method whether or not the Company receives the related cash flow. The OID
income attributable to a subordinated MBS Interest generally will increase the
Company's REIT distribution requirement in the early years of the Company's
ownership of the MBS Interest even though the Company may not receive the
related cash flow from the MBS Interest until a later taxable year. As a
result, the Company could be required to borrow funds, to issue capital stock
or to liquidate assets in order to satisfy the REIT distribution requirement
for any taxable year. See "Risk Factors--Legal and Tax Risks." There can be no
assurance that the Company's strategy for investing in subordinated MBS
Interests will be successful.
In addition, because the payment of interest on certain subordinated MBS
Interests (including particularly Sub IOs) will be subordinated to the payment
of interest on the senior classes of such series of MBS, even if the
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subordinated MBS Interest does not have OID, the Company may recognize
interest income on the MBS Interests without the receipt of cash. As a result,
the Company could be required to borrow funds, issue capital stock or to
liquidate assets in order to satisfy the REIT distribution requirement for any
taxable year.
COMMERCIAL MORTGAGE-BACKED SECURITIES. It is expected that many of the MBS
Interests acquired by the Company will be interests in CMBS. The Mortgage
Collateral supporting CMBS may be pools of whole loans or other MBS, or both.
Of the interests in CMBS that the Company acquires, most will be subordinated
or IO classes of MBS Interests, but the Company also may acquire more senior
classes or combined classes of first-loss and more senior CMBS.
Unlike RMBS, which typically are collateralized by thousands of single
family mortgage loans, CMBS are collateralized generally by a more limited
number of commercial or multifamily mortgage loans with larger principal
balances than those of single family mortgage loans. As a result, a loss on a
single mortgage loan underlying a CMBS will have a greater negative effect on
the yield of such CMBS, especially the subordinated MBS Interests in such
CMBS.
With respect to CMBS, the Company will use sampling and other appropriate
analytical techniques to determine on a loan-by-loan basis which loans will
undergo a full-scope review and which loans will undergo a more streamlined
review process. Although the choice is a subjective one, considerations that
influence the choice for scope of review often include loan size, debt service
coverage ratio, loan to value ratio, loan maturity, lease rollover, property
type and geographic location. A full-scope review may include, among other
factors, a property site inspection, tenant-by-tenant rent roll analysis,
review of historical income and expenses for each property securing the loan,
a review of major leases for each property (if available); recent appraisals
(if available), engineering and environmental reports (if available), and the
price paid for similar CMBS by unrelated third parties in arms' length
purchases and sales (if available) or a review of broker price opinions (if
the price paid by a bona fide third party for similar CMBS is not available
and such price opinions are available). For those loans that are selected for
the more streamlined review process, the Manager's evaluation may include a
review of the property operating statements, summary loan level data, third
party reports, and a review of prices paid for similar CMBS by bona fide third
parties or broker price opinions, each as available. If the Manager's review
of such information does not reveal any unusual or unexpected characteristics
or factors, no further due diligence is performed.
The Company believes that there will be opportunities to invest in MBS
Interests in CMBS. Increasingly, owners of commercial mortgage loans are
choosing to securitize their portfolios. However, no assurances can be made
that appropriate opportunities for investment in CMBS will continue to be
available.
RESIDENTIAL MORTGAGE-BACKED SECURITIES. The Company intends to acquire MBS
Interests in RMBS collateralized by "non-conforming" mortgage loans, that is,
one- to four-family mortgage loans that do not qualify for sale to FHLMC or
FNMA. Typically, non-conforming mortgage loans do not meet agency guarantee
criteria because their principal balance exceeds agency limits (e.g., $214,600
is the current single-family mortgage loan limit of both FNMA and FHLMC).
Sometimes the mortgage loan or the borrower does not meet other agency credit
underwriting standards.
The process of a single-family mortgage loan securitization is similar to
the process of a commercial mortgage loan securitization. As in CMBS, a
typical RMBS series allocates the cash flow on the underlying mortgage loans
so that the subordinated classes of MBS Interests shield the more senior
classes from losses due to defaults on the underlying residential mortgage
loans, resulting in substantially greater credit risk to such subordinated MBS
Interests.
In addition to creating credit support for the more senior classes, another
general goal in allocating cash flows from the mortgage loans to the various
classes of a securitization, particularly an RMBS issuance, is to create
certain classes on which the expected cash flows have a higher degree of
predictability than the cash flow on the underlying mortgage loans. As a
general matter, the more predictable the cash flow is on a particular
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RMBS class, the lower the anticipated yield will be on that class at the time
of issuance relative to prevailing market yields on certain other RMBS. As
part of the process of creating more predictable cash flows on certain classes
of a non-conforming mortgage loan securitization, one or more classes
generally must be created that absorb most of the changes in the cash flows
from the Mortgage Collateral. The yields on these classes generally are higher
than prevailing market yields on MBS with similar expected average lives.
Because of the uncertainty of the cash flows on these classes, the market
prices of, and yields on, these classes are more volatile.
The Company may acquire MBS Interests in RMBS secured by lower credit
quality mortgage loans known as "B," "C" and "D" mortgage loans. B, C and D
mortgage loans are loans made to borrowers who have credit histories of a
lower overall quality than "A" borrowers. These credit histories generally
result from previous repayment difficulties, brief job histories, previous
bankruptcies or other causes. Except with respect to loans originated under
programs sponsored by HUD, the loan-to-value ratio for a B, C and D mortgage
loan is typically significantly lower than the loan-to-value ratio of an "A"
mortgage loan, and the pass-through coupon of a B, C and D mortgage loan is
typically higher than the coupon on an A mortgage loan. As a result of the
typically lower loan-to-value ratios and higher yields on B, C and D mortgage
loans, the Company believes these RMBS with B, C and D mortgage collateral may
justify accepting the higher credit risk associated with such borrowers.
Although the RMBS market has matured, the Company believes that acquisition
opportunities continue to be available in MBS Interests in RMBS. The Company
will seek, among other things, to manage the credit risks associated with
making this type of investment through certain credit underwriting procedures
(that is, a review of the expected economic performance of, and risks
associated with, such interests) and through leverage. No assurance can be
given that any of the foregoing developments actually will occur.
Residential mortgage loans typically do not have any prepayment penalty,
with the result that prepayments tend to increase during periods of falling
interest rates, and decrease during periods of rising interest rates. However,
prepayments are dependent upon a number of other factors as well (such as the
number of jobs available in the area, general economic conditions and the
borrower's need for additional cash). Commercial mortgage loans often carry
prepayment restrictions, or require that the borrower pay a prepayment penalty
(which may not benefit of the holder of the IO). In any event, it is very
difficult to predict the prepayment pattern for any particular Mortgage
Collateral, which makes it harder to predict the actual yield with respect to
an IO. See "Yield Considerations Related to the Company's Investments--IOs,
Inverse IOs and Sub IOs," "Yield Considerations Related to the Initial MBS
Interests" and "Risk Factors--Risks Related to Investments in MBS Interests--
Interest Rate Risks Related to Subordinated MBS Interests, IOs and POs."
MULTIFAMILY AND COMMERCIAL REAL PROPERTIES. The Company believes that under
appropriate circumstances the acquisition of multifamily and commercial Real
Properties, including REO Properties and other Distressed Real Properties, may
offer significant opportunities to the Company. The Company's policy will be
to conduct an investigation and evaluation of the Real Properties in a
portfolio of Real Properties before purchasing such a portfolio. Prior to
purchasing Real Estate Related Assets, the Manager generally will identify and
contact real estate brokers and/or appraisers in the relevant market areas to
obtain rent and sale comparables for the assets in a portfolio contemplated to
be acquired. This information is used to supplement due diligence that is
performed by the Manager's employees.
The Company's due diligence generally may include the review of market
studies for each market within a portfolio. The studies typically will include
area economic data, employment trends, absorption rates and market rental
rates. Due diligence also will include site inspections by the Manager's
employees or agents of most properties in a portfolio and a review of all
available asset files and documentation. Sources of information examined to
determine value also may include: (a) current and historical operating
statements; (b) leases; (c) rent and sales comparables; (d) industry
statistics and reports regarding operating expenses such as those compiled by
the Institute of Real Estate Management; (e) existing appraisals; and (f)
deferred maintenance observed during site inspections or described in
structural reports, and correspondence found in the loan files. The
information compiled is then analyzed to determine a valuation for each
property.
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The Manager is expected to develop projections of net operating income and
cash flows taking into account lease rollovers, tenant improvement costs and
leasing commissions. The Manager will compare its estimates of revenue and
expenses to historical operating statements and estimates provided in
appraisals and general industry and regional statistics. Market capitalization
rates and discount rates are then applied to the cash flow projections to
estimate values. These values are then compared to available appraisals and
market sale comparables to determine recommended bid prices for each asset.
The amount offered by the Company generally will take into account projected
holding periods, capital costs and projected profit expectations, and will be
the price that the Manager estimates is sufficient to generate an acceptable
risk-adjusted return on the Company's investment.
After the Company acquires Distressed Real Property, the Company's goal will
be to improve management of that Real Property so as to increase its cash
flow. If cash flows can be increased and the net operating income stabilized,
the Company may seek an opportunity to sell the Real Property. The length of
time the Company will hold Distressed Real Properties may vary considerably
from asset to asset, and will be based on the Manager's analysis and
conclusions as to the best time to sell some or all of them.
If the Company is offered the opportunity to acquire Real Property that is
likely to be held for fewer than four years, the Company intends to establish
a taxable corporation in which the Company or, if it has been formed, the
Operating Partnership will hold a 95% non-voting ownership interest to make
the acquisition. Such a corporation will not be eligible for taxation as a
qualified REIT subsidiary, and any profits that it earns on its activities
will be subject to federal corporate income tax before they are distributable
to the Company. If the Company acquires Real Property with the intent to hold
it for more than four years, but an opportunity arises to sell the property
sooner, the Company will consider certain strategies, such as a like-kind
exchange, to reduce any negative tax consequences relating to the sale. Income
from such sale will be nonqualifying income for purposes of the 30% gross
income test. See "Federal Income Tax Considerations--Requirements for
Qualification--Income Tests."
Although the Company believes that a permanent market for the acquisition of
Distressed Real Property has emerged in recent years within the private
sector, there can be no assurance that the Company will be able to acquire the
desired amount and type of Distressed Real Property in future periods or that
there will not be significant inter-period variations in the amount of such
acquisitions. See "Risk Factors--Risks Related to Investments in Mortgage
Loans--Volatility of Values of Mortgaged Properties." Moreover, there can be
no assurance that the Company will be effective in making any asset acquired
more valuable than the price paid to acquire it. See "Risk Factors."
FOREIGN REAL PROPERTIES. In addition to acquiring Distressed Real
Properties, the Company may acquire or originate Mortgage Loans secured by
Real Property located outside the United States or acquire such Real Property,
but the Company does not intend to invest more than 20% of its portfolio in
foreign Real Property and Mortgage Loans secured by foreign Real Property.
Investing in Real Estate Related Assets located in foreign countries creates
risks associated with the uncertainty of foreign laws and markets and risks
related to currency conversion. The Company may be subject to foreign income
tax with respect to its investments in foreign Real Estate Related Assets.
However, any foreign tax credit that otherwise would be available to the
Company for U.S. federal income tax purposes will not flow through to the
Company's stockholders.
SALE-LEASEBACK TRANSACTIONS. The Company may participate in sale-leaseback
transactions, in which the Company would acquire improved or unimproved Real
Property and then lease such Real Property back to the seller under a long-
term triple net lease. The Company also may provide financing necessary to
build commercial improvements on the Real Property, to refinance existing debt
on the Real Property or to provide additional funds to operate the business.
After participating in a number of these transactions, the Company may pool
the leased Real Property and issue debt collateralized by the Real Property
and the related leases in a securitization transaction.
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PORTFOLIO MANAGEMENT
The following describes some of the investment management practices that the
Company may employ from time to time to earn income, facilitate portfolio
management (including managing the effect of maturity or interest rate
sensitivity) and mitigate risk (such as the risk of changes in interest
rates). There can be no assurance that the Company will not amend or deviate
from these policies or adopt other policies in the future.
LEVERAGE AND BORROWING. The Company intends to leverage its assets through
securitizations and other borrowings, generally through the issuance of CMOs
and the use of warehouse lines of credit, reverse repurchase agreements, bank
credit facilities, mortgage loans on Real Property and other borrowings, when
the opportunity to use leverage is present and there is an expectation that
such leverage will benefit the Company. However, the Company does not intend
to borrow funds from Imperial Credit or its affiliates. If changes in market
conditions cause the cost of such financing to increase relative to the income
that can be derived from securities purchased with the proceeds thereof, the
Company may reduce the amount of leverage it utilizes.
Leverage creates an opportunity for increased income but, at the same time,
creates risks. For example, leveraging magnifies changes in the net worth of
the Company and affects the amounts available for distribution to
stockholders. Although the amount owed will be fixed, the Company's assets may
change in value during the time the debt is outstanding. Leverage will create
interest expenses for the Company which can exceed the revenues from the
assets retained.
To the extent the revenues derived from assets acquired with borrowed funds
exceed the interest expense the Company will have to pay, the Company's net
income will be greater than if borrowing had not been used. Conversely, if the
revenues from the assets acquired with borrowed funds are not sufficient to
cover the cost of borrowing, the net income of the Company will be less than
if borrowing had not been used, and therefore the amount available for
distribution to stockholders will be reduced. See "Risk Factors--Economic and
Business Risks--Leverage Can Reduce Income Available for Distribution."
Under certain circumstances, and notwithstanding adverse interest rate or
market conditions, the Company may use leverage to obtain sufficient cash to
make required distributions of dividends or to fund share repurchases and
tender offers when such leveraging is deemed to be in the best interests of
stockholders. Such situations may arise if ICCMIC's status as a REIT or its
ability to maintain minimum liquidity levels is endangered.
CMOS AND WAREHOUSE LINES OF CREDIT. The Company intends to acquire Mortgage
Loans and to issue non-REMIC CMOs collateralized by such loans. Moreover, the
Company may issue non-REMIC CMOs collateralized by previously issued CMOs or
MBS in transactions known as "resecuritizations." The Company will structure a
resecuritization in the same manner as a securitization. The collateral
(whether whole mortgage loans or MBS) will be transferred into a qualified
REIT subsidiary, and that entity (or a special purpose trust or corporation
formed by that entity) will issue non-REMIC CMOs. The transaction will be
structured as debt, with the issuer retaining an equity interest in the
collateral. In a debt transaction, the principal balance of the collateral
(whether whole loans or MBS) will exceed the principal balance of the CMOs.
Thus, once the CMOs are paid in full, the issuer will own the collateral free
of the lien of the CMO debt. During the period in which the Company is
acquiring mortgage loans for securitization, the Company is likely to borrow
funds secured by such loans pursuant to warehouse lines of credit.
REVERSE REPURCHASE AGREEMENTS. The Company intends to enter into reverse
repurchase agreements, which are agreements under which the Company would sell
assets to a third party with the commitment that the Company repurchase such
assets from the purchaser at a fixed price on an agreed date. Reverse
repurchase agreements will be treated for federal income tax purposes as loans
to the Company from the other party that are secured by the underlying assets.
The repurchase price reflects the purchase price plus an agreed market rate of
interest.
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BANK CREDIT FACILITIES. The Company intends to borrow money through various
bank credit facilities, which will have varying interest rates, may be fixed
or adjustable, and may have varying maturities.
MORTGAGE LOANS ON REAL PROPERTY OWNED BY THE COMPANY. The Company expects to
borrow funds secured by mortgages on the Company's Real Property, including
any Distressed Real Properties owned by the Company.
INTEREST RATE MANAGEMENT TECHNIQUES. The Company may engage in a variety of
interest rate management techniques for the purpose of managing the effective
maturity or interest rate of its assets. These techniques also may be used to
attempt to protect against declines in the market value of the Company's
assets resulting from general trends in debt markets. Any such transaction is
subject to risks, and may limit the potential earnings on the Company's
investment in real Estate Related Assets. Such techniques may include puts and
calls on securities or indices of securities, Eurodollar futures contracts and
options on such contracts, interest rate swaps (the exchange of fixed-rate
payments for floating-rate payments), or other such transactions. Applicable
REIT qualification rules may limit the Company's ability to use these
techniques, except through a corporate subsidiary that is fully subject to
corporate income taxation. See "--Hedging" and "Federal Income Tax
Considerations--Requirements for Qualification--Income Tests."
HEDGING. The Company may enter into hedging transactions and may at times be
fully hedged against variable-rate indebtedness incurred by the Company to
finance its acquisition and origination of Mortgage Loans and MBS Interests to
provide protection from interest rate fluctuations or other market movements.
The Company does not intend to hedge for speculative purposes. With respect to
assets, hedging can be used either to increase the liquidity or decrease the
risk of holding an asset by guaranteeing, in whole or in part, the price at
which such asset may be disposed of prior to its maturity and may also be used
to receive interest income in excess of specified interest rate caps. With
respect to indebtedness, hedging can be used to limit, fix or cap the interest
rate on variable interest rate indebtedness.
The Company's hedging activities may include interest rate swaps, the
purchase of interest rate caps and the purchase of excess servicing rights
constituting "real estate assets" for purposes of the REIT qualification tests
under the Internal Revenue Code. See "Federal Income Tax Considerations--
Requirements for Qualification--Asset Tests." The Company may hedge against
interest rate increases by purchasing Qualified Hedges. A "Qualified Hedge"
for this purpose is limited to a bona fide interest rate swap or cap agreement
entered into by the Company to hedge any variable rate indebtedness that the
Company may incur to acquire or carry real estate assets, or any other option
or other investment made by the Company to hedge its Mortgage Loans and MBS
Interests or its borrowings that have been determined by a favorable opinion
of counsel to generate qualified income for purposes of the 95% gross income
test applicable to REITs. See "Federal Income Tax Considerations--Requirements
for Qualification--Income Tests." The provisions of the Code regarding the
qualification of an entity as a REIT may restrict the Company's ability to
enter into hedging transactions. See "Federal Income Tax Considerations--
Requirements for Qualification--Asset Tests" and "--Income Tests." The Company
also may purchase or sell financial futures contracts and options on financial
futures contracts, trade forward contracts and employ other hedging strategies
that do not constitute Qualified Hedges. The provisions of the Code regarding
qualification of an entity as a REIT may restrict severely the Company's
ability to employ these other strategies or may require the Company to conduct
part or all of its hedging activities through a taxable corporation.
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MANAGEMENT OF OPERATIONS
IMPERIAL CREDIT INDUSTRIES, INC.
Imperial Credit is a diversified financial services company that, together
with its affiliates, is primarily engaged in the origination, acquisition,
management, securitization and resolution of various types of loans and
leases, and in diverse mortgage lending activities. The activities of Imperial
Credit are primarily conducted through its numerous subsidiaries and other
entities in which it holds a significant interest. At June 30, 1997, Imperial
Credit had $2.28 billion of total assets and stockholders' equity of $264.0
million.
Imperial Credit was organized as a California corporation in 1986. In 1995,
Imperial Credit began to reposition its business from originating and selling
conforming residential Mortgage Loans to offering higher margin loan and lease
products. It has sought to accomplish this through a business strategy that
emphasizes: (i) opportunistic expansion and acquisitions of businesses in
niche segments of the financial services industry, (ii) disciplined
underwriting and credit risk management, (iii) loan and lease originations,
where possible, on a wholesale basis, (iv) securitization or sale in the
secondary market of substantially all of its loans and leases, other than
those held by SPTL or other subsidiaries for investment, and (v) maintaining
business and financial flexibility to take advantage of changing market
conditions with respect to specific financial services businesses.
Although many of the Company's prospective competitors may have access to
greater capital and other advantages, the Company believes that the experience
of Imperial Credit and its affiliates in originating Mortgage Loans and other
loan and lease products, and creating, acquiring and managing MBS, will
provide it with the means to compete. It should be noted, however, that
Imperial Credit has conducted its operations primarily through various
subsidiaries and other entities, which have different investment objectives
and different investment guidelines than the Company will have. There can be
no assurance that the resources and relationships developed by Imperial Credit
will enable the Company to be successful.
Imperial Credit's executive offices are located at 23550 Hawthorne
Boulevard, Building One, Suite 110, Torrance, California 90505 and the
telephone number of its executive offices is (310) 373-1704.
THE MANAGER
The Manager is a wholly-owned subsidiary of Imperial Credit. The following
tables set forth certain information about the directors and executive
officers of the Manager. Each of the directors of the Manager is also a
director of the Company. No director or executive officer is related by blood,
marriage or adoption to any other director or executive officer of the Company
or the Manager or any of their respective affiliates.
DIRECTORS OF THE MANAGER
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
---- --- ----------------
<S> <C> <C>
H. Wayne Snavely.................... 56 Chairman of the Board of Directors
Kevin E. Villani.................... 49 Vice Chairman of the Board of Directors
Mark S. Karlan...................... 38 President and Chief Executive Officer
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
<CAPTION>
NAME AGE POSITION(S) HELD
---- --- ----------------
<S> <C> <C>
Joseph R. Parise.................... 38 Managing Director
Norbert M. Seifert.................. 41 Senior Vice President
</TABLE>
H. WAYNE SNAVELY has been Chairman of the Board and Chief Executive Officer
of Imperial Credit since December 1991 and President since February 1996. From
1986 to February 1992, Mr. Snavely served as Executive Vice President of
Imperial Bancorp and Imperial Bank with direct management responsibility for
the following bank subsidiaries and divisions: Imperial Bank Mortgage, SPTL,
Imperial Trust Company, Wm. Mason & Company, Imperial Ventures, Inc. and The
Lewis Horwitz Organization. From 1983 through 1986,
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Mr. Snavely was employed as Chief Financial Officer of Imperial Bancorp and
Imperial Bank. Mr. Snavely served as a director of Imperial Bank from 1975 to
1983 and currently serves as a director. Mr. Snavely is Chairman of the Board
of SPFC and IMH.
KEVIN E. VILLANI has been the Executive Vice President and Chief Financial
Officer of Imperial Credit since September 1995. From 1993 to 1996, Mr.
Villani was the Associate Professor of Clinical Finance and Real Estate for
the University of Southern California. From 1985 to 1990, he was the Executive
Vice President and Chief Financial Officer for Imperial Corporation of
America. From 1982 to 1985, he served in various senior executive capacities
at the Federal Home Loan Mortgage Corporation. From 1975 to 1982, he served as
the Financial Economist, The Director for the Division of Housing Finance
Analysis and The Deputy Assistant Secretary for the Office of Economic Affairs
and Chief Economist for the Department of Housing and Urban Development. From
1974 to 1975, he was an economist for the Federal Reserve Bank of Cleveland.
Mr. Villani has also served as a consultant to the World Bank and USAID on
banking, housing, finance, and privatization.
MARK S. KARLAN joined Imperial Credit in June 1997. From 1990 to 1997, Mr.
Karlan was a private real estate investor managing all aspects of
approximately $100 million of real estate transactions including the
acquisition, financing, leasing and sale of office, retail, industrial and
residential assets. From 1984 to 1990, Mr. Karlan served in the acquisition
group of JMB Realty Corporation, most recently as Senior Vice President. Mr.
Karlan acquired for institutional clients more than one hundred commercial
properties including shopping centers, office buildings, apartment complexes
and hotels located throughout the United States and Canada, with a gross asset
value exceeding $6 billion. Mr. Karlan had full responsibility for
negotiating, structuring and analyzing all assets he acquired for JMB,
including valuation and credit analyses and cash flow projections. Mr.
Karlan's primary focus was larger portfolio acquisitions. In 1987, Mr. Karlan
led the 100 person JMB acquisition team during the $5 billion leveraged
acquisition of the Cadillac Fairview, Inc. real estate company. In 1987, Mr.
Karlan became the youngest partner of JMB. Mr. Karlan received a Bachelor of
Arts degree in Economics, magna cum laude, from Harvard College in 1980 and
was awarded a John Harvard Scholarship for academic achievement of the highest
distinction. Mr. Karlan received a Master of Business Administration degree
with second year honors from the Harvard Business School and a Juris Doctor
degree, cum laude, from the Harvard Law School, both in 1984.
JOSEPH R. PARISE has served as Managing Director of Capital Markets and Head
of Structured Finance for Imperial Credit since August 1996 and he will
continue to hold that position. Mr. Parise served from April 1995 through
April 1997 on the investment advisory committee for the City of Orange,
overseeing a $125 million fixed income portfolio. From 1987 to 1992, Mr.
Parise served in the mortgage finance group at Salomon Brothers Inc, most
recently as Vice President. At Salomon Brothers, he was involved in 50 CMO and
pass-through securitizations exceeding $8 billion, and helped create several
innovations in securitization techniques. Mr. Parise also participated in the
early development of "B" and "C" credit residential mortgage securitization.
Prior to Salomon Brothers, Mr. Parise was a tax attorney specializing in
mortgage-backed securities at Cadwalader, Wickersham & Taft from 1985 to 1987
and at Thacher, Proffitt & Wood from 1983 to 1985. At Cadwalader, Mr. Parise
was involved in the development of the REMIC legislation. Mr. Parise received
an Master of Laws degree in Taxation from the New York University School of
Law, a Juris Doctor degree from the University of Michigan Law School and a
Bachelor of Business Administration degree with high distinction from the
University of Michigan where he was a James B. Angell Scholar.
NORBERT M. SEIFERT was a partner at the law firm of Sonnenschein Nath &
Rosenthal from 1992 to 1997. At Sonnenschein, Mr. Seifert represented
institutional lenders in the origination and sale of term loans and
construction loans secured by multifamily and commercial real estate, and he
was involved in restructuring underperforming mortgage loans. From 1989 to
1992, Mr. Seifert was a partner in the real estate department of Mayer, Brown
& Platt and from 1987 to 1989 he was a partner at Turkowitz & Seifert. From
1982 through 1987, Mr. Seifert was an associate in the tax and real estate
departments of Milbank, Tweed, Hadley & McCloy where, among other things, he
was involved in structuring the initial public offering of the Rockefeller
Center Properties, Inc. mortgage REIT. Mr. Seifert received a Bachelor of
Science degree, cum laude, from the Wharton School of the University of
Pennsylvania in 1977 and a Juris Doctor degree from the New York University
School of Law in 1980.
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Officers, directors and other personnel have significant experience in
mortgage finance and in the acquisition and management of commercial real
estate; however, with the exception of H. Wayne Snavely, who is the Chairman
of the Board of Directors of IMH, none of them previously has managed a REIT.
See "Risk Factors--Other Risks--Newly Organized Corporation."
THE MANAGEMENT AGREEMENT
The Company will enter into the Management Agreement with the Manager for an
initial term expiring on the second anniversary of the Closing Date.
Thereafter, successive extensions, each for a period not to exceed two years,
may be made by agreement between the Company and the Manager, subject to the
affirmative vote of a majority of the Independent Directors. The Company may
terminate, or decline to renew the term of, the Management Agreement without
cause at any time after the first two years upon 60 days written notice by a
majority vote of the Independent Directors; provided that a termination fee
will be due. In addition, the Company has the right to terminate the
Management Agreement upon the occurrence of certain specified events,
including a material breach by the Manager of any provision contained in the
Management Agreement that remains uncured at the end of the applicable cure
period, without the payment of any termination fee.
Pursuant to the provisions of the Management Agreement, the Manager at all
times will be subject to the supervision of ICCMIC's Board of Directors and
will have only such functions and authority as the Company delegates to it.
The Manager will advise the Board of Directors as to the activities and
operations of the Company. The Manager will be responsible for the day-to-day
operations of the Company pursuant to the authority granted to it by the Board
of Directors under the Management Agreement, and the Manager will perform (or
cause to be performed) such services and activities relating to the assets and
operations of the Company as may be directed by the Board of Directors or as
the Manager otherwise considers appropriate, including:
(i) serving as the Company's consultant with respect to formulation of
investment criteria and preparation of policy Guidelines by the Board of
Directors;
(ii) advising and representing the Company in connection with the
acquisition and commitment to acquire assets, the sale and commitment to
sell assets, and the maintenance and administration of its portfolio of
assets;
(iii) advising the Company regarding, and arranging for, (a) the issuance
of CMOs collateralized by the Company's Mortgage Loans, (b) reverse
repurchase agreements on the Company's MBS Interests, and (c) other
borrowings, as appropriate;
(iv) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for
the Company by the Manager;
(v) monitoring and providing to the Board of Directors on an ongoing
basis price information and other data obtained from dealers that maintain
markets in assets identified by the Board of Directors from time to time,
and providing data and advice to the Board of Directors in connection with
the identification of such dealers;
(vi) providing executive and administrative personnel, office space and
office services required in rendering services to the Company;
administering the day-to-day operations of the Company; and performing and
supervising the performance of such other administrative functions
necessary in the management of the Company, including the collection of
revenues and the payment of the Company's debts and obligations and
maintenance of appropriate computer services to perform such administrative
functions;
(vii) communicating on behalf of the Company with the holders of any
equity or debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies or
trading markets and to maintain effective relations with such holders;
(viii) to the extent not otherwise subject to an agreement executed by
the Company, designating a servicer for mortgage loans sold to the Company
and arranging for the monitoring and administering of such servicers;
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(ix) counseling the Company in connection with policy decisions to be
made by the Board of Directors;
(x) engaging in hedging activities on behalf of the Company which are
consistent with the Company's status as a REIT and with the Guidelines;
(xi) upon request by and in accordance with the directions of the Board
of Directors, investing or reinvesting any money of the Company;
(xii) counseling the Company regarding the maintenance of its exemption
from the Investment Company Act and monitoring compliance with the
requirements for maintaining exemption from that Act;
(xiii) counseling the Company regarding the maintenance of its status as
a REIT and monitoring compliance with the various REIT qualification tests
and other rules set out in the Code and Treasury Regulations thereunder;
and
(xiv) counseling the Company as to compliance with all applicable laws,
including those that would require the Company to qualify to do business in
particular jurisdictions.
The Manager will perform portfolio management services on behalf of the
Company pursuant to the Management Agreement with respect to the Company's
investments. Such services will include, but not be limited to, consulting the
Company on purchase, sale and other opportunities, collection of information
and submission of reports pertaining to the Company's assets, interest rates,
and general economic conditions, periodic review and evaluation of the
performance of the Company's portfolio of assets, acting as liaison between
the Company and banking, mortgage banking, investment banking and other
parties with respect to the purchase, financing and disposition of assets, and
other customary functions related to portfolio management. The Manager may
enter into subcontracts with other parties, including Imperial Credit and its
affiliates, to provide any such services to the Company.
The Manager will perform monitoring services on behalf of the Company
pursuant to the Management Agreement with respect to loan servicing activities
provided by third parties and with respect to the Company's portfolio of
Special Servicing rights. Such monitoring services will include, but not be
limited to, the following activities: negotiating Special Servicing
agreements; acting as a liaison between the servicers of the Mortgage Loans
and the Company; review of servicers' delinquency, foreclosures and other
reports on Mortgage Loans; supervising claims filed under any mortgage
insurance policies; and enforcing the obligation of any servicer to repurchase
Mortgage Loans. The Manager may enter into subcontracts with other parties,
including its affiliates, to provide any such services for the Manager.
MANAGEMENT FEES
The Manager will receive a base management fee calculated as a percentage of
the Average Invested Assets of the Company for each calendar quarter and equal
to 1% per annum of the first $1 billion of such Average Invested Assets, .75%
of the next $250 million of such Average Invested Assets, and .50% of Average
Invested Assets above $1.25 billion. The term "Average Invested Assets" for
any period means the average of the aggregate book value of the assets of the
Company, including the assets of all of its direct and indirect subsidiaries,
before reserves for depreciation or bad debts or other similar noncash
reserves, computed by taking the daily average of such values during such
period. The Manager will not receive any management fee for the period prior
to the sale of the shares of Common Stock offered hereby. The base management
fee is intended to compensate the Manager for its costs in providing
management services to the Company. The Board of Directors of the Company may
adjust the base management fee in the future if necessary to align the fee
more closely with the costs of such services.
The Manager shall be entitled to receive incentive compensation for each
fiscal quarter in an amount equal to the product of (A) 25% of the dollar
amount by which (1)(a) Funds from Operations of the Company (before the
incentive fee) per share of Common Stock (based on the weighted average number
of shares outstanding) plus (b) gains (or minus losses) from debt
restructuring and sales of property per share of Common Stock (based on the
weighted average number of shares outstanding), exceed (2) an amount equal to
(a) the weighted average of the price per share at the initial offering and
the prices per share at any secondary offerings by the Company
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multiplied by (b) the Ten-Year U.S. Treasury Rate plus four percent per annum
multiplied by (B) the weighted average number of shares of Common Stock
outstanding during such quarter. "Funds from Operations" as defined by the
National Association of Real Estate Investment Trusts ("NAREIT") means net
income (computed in accordance with GAAP) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization on real
estate assets, and after adjustments for unconsolidated partnerships and joint
ventures. Funds from Operations does not represent cash generated from
operating activities in accordance with GAAP and should not be considered as an
alternative to net income as an indication of the Company's performance or to
cash flows as a measure of liquidity or ability to make distributions. As used
in calculating the Manager's compensation, the term "Ten Year U.S. Treasury
Rate" means the arithmetic average of the weekly average yield to maturity for
actively traded current coupon U.S. Treasury fixed interest rate securities
(adjusted to constant maturities of ten years) published by the Federal Reserve
Board during a quarter, or, if such rate is not published by the Federal
Reserve Board, any Federal Reserve Bank or agency or department of the federal
government selected by the Company. If the Company determines in good faith
that the Ten Year U.S. Treasury Rate cannot be calculated as provided above,
then the rate shall be the arithmetic average of the per annum average yields
to maturities, based upon closing asked prices on each business day during a
quarter, for each actively traded marketable U.S. Treasury fixed interest rate
security with a final maturity date not less than eight nor more than twelve
years from the date of the closing asked prices as chosen and quoted for each
business day in each such quarter in New York City by at least three recognized
dealers in U.S. government securities selected by the Company.
The ability of the Company to generate Funds from Operations in excess of the
Ten Year U.S. Treasury Rate, and of the Manager to earn the incentive
compensation described in the preceding paragraph, is dependent upon the level
and volatility of interest rates, the Company's ability to react to changes in
interest rates and to utilize successfully the operating strategies described
herein, and other factors, many of which are not within the Company's control.
COSTS AND EXPENSES
The Manager will be reimbursed for (or charge the Company directly for) the
Manager's costs and expenses in employing third-parties to perform due
diligence tasks on assets purchased or considered for purchase by the Company.
The management fees are payable in arrears. The Manager's base and incentive
fees and reimbursable costs and expenses shall be calculated by the Manager
within 45 days after the end of each quarter, and such calculation shall be
promptly delivered to the Company. The Company is obligated to pay such fees,
costs and expenses within 60 days after the end of each fiscal quarter.
STOCK OPTIONS
The Company intends to adopt a non-qualified stock option plan (the "Option
Plan") which provides for options to purchase shares of Common Stock. The
maximum aggregate number of shares of Common Stock that may be issued pursuant
to options granted under the Option Plan is 6,700,000. The purpose of the
Option Plan is to provide a means of performance-based compensation in order to
provide incentive for the Manager and certain of its executive officers and
directors to enhance the value of ICCMIC's stock.
Before Closing, the Company will grant to the Manager and certain officers
and directors of Manager options under the Option Plan, representing the right
to acquire 2,000,000 shares of Common Stock (2,300,000 shares of Common Stock
if the Underwriters exercise their over-allotment option), at an exercise price
per share equal to the initial offering price of the Common Stock. If the
options could be exercised immediately, they would represent 10% of the number
of shares of Common Stock otherwise outstanding after completion of this
offering. However, the options cannot be exercised immediately. One third of
those options become exercisable on each of the first three anniversaries of
the Closing Date. The unexercised options terminate on the tenth anniversary of
the Closing Date.
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The Board of Directors may amend the Option Plan at any time, except that
approval by ICCMIC's stockholders is required for any amendment that increases
the aggregate number of shares of Common Stock that may be issued pursuant to
the Option Plan, increases the maximum number of shares of Common Stock that
may be issued to any person, changes the class of persons eligible to receive
such options, modifies the period within which the options may be granted,
modifies the period within which the options may be exercised or the terms
upon which options may be exercised, or increases the material benefits
accruing to the participants under the plan. Unless previously terminated by
the Board of Directors, the Option Plan will terminate ten years from the
Closing Date.
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to render the services called for thereunder and
will not be responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. The Manager,
its directors and its officers will not be liable to the Company, any
subsidiary of the Company, the Independent Directors, ICCMIC's stockholders or
any subsidiary's stockholders for acts performed in accordance with and
pursuant to the Management Agreement, except by reason of acts constituting
bad faith, willful misconduct, gross negligence or reckless disregard of their
duties under the Management Agreement. The Company has agreed to indemnify the
Manager, its directors and its officers with respect to all expenses, losses,
damages, liabilities, demands, charges and claims arising from acts of the
Manager not constituting bad faith, willful misconduct, gross negligence or
reckless disregard of duties, performed in good faith in accordance with and
pursuant to the Management Agreement.
The Management Agreement does not limit or restrict the right of the Manager
or any of its officers, directors, employees or Affiliates to engage in any
business or to render services of any kind to any other person, including the
purchase of, or rendering advice to others purchasing, assets that meet the
Company's policies and criteria, except that the Manager may not manage or
advise another REIT or other entity that invests or intends to invest
primarily in commercial and multifamily Mortgage Loans or subordinated CMBS
Interests. Moreover, the directors and certain of the executive officers of
the Manager will execute non-compete agreements that will preclude them from
leaving the Manager and, under certain circumstances, forming or joining
another REIT that invests or intends to invest primarily in commercial and
multifamily Mortgage Loans or subordinated CMBS Interests.
Imperial Credit and its affiliates, including SPTL, expect to continue to
originate Mortgage Loans and MBS Interests. SPTL will enter into an agreement
granting the Company, as long as the Management Agreement is in effect, a
right of first offer to purchase, in addition to the Initial Investments, not
less than $150 million annually of multifamily and commercial Mortgage Loans
typical of those originated by SPTL. Although not contractually committed to
do so, the Company intends to purchase Mortgage Loans offered to it pursuant
to the foregoing right of first offer, subject to compliance with the
Guidelines and underwriting criteria as established and modified from time to
time by the Company's Independent Directors.
The Company expects to maintain a relationship with Imperial Credit and SPTL
in which the Company will be a ready, willing and able purchaser of MBS
Interests that may be sold from time to time by SPTL. Although no binding
commitment will exist on the part of Imperial Credit, SPTL or the Company
regarding the sale and purchase of MBS Interests, the Company expects to be
able to purchase MBS Interests from SPTL at prices and on terms meeting the
Company's investment criteria. The Company expects that Imperial Credit and
SPTL will offer to sell assets to the Company on terms and at prices that, in
the aggregate, will be fair to both parties, subject to compliance with the
Guidelines. See "Management of Operations--Certain Relationships; Conflicts of
Interest." In deciding whether to acquire any such asset, the Manager may
consider, among other factors, whether acquisition of the asset will enhance
the Company's ability to achieve or exceed the Company's risk adjusted target
rate of return established for that period by the Company's Board of
Directors, whether the asset otherwise is well-suited for the Company and
whether the Company is financially able to take advantage of the investment
opportunity. If an asset that otherwise meets all of the Company's criteria
for asset acquisition is
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being offered to the Company at a price that is greater, or on terms that are
less favorable, than would be required by third parties for similar assets in
bona fide arms' length transactions, the Manager would be expected to recommend
that the Company decline to acquire that asset at the quoted price and terms,
notwithstanding the relationship among the Company, Imperial Credit and SPTL.
See "Risk Factors--Other Risks--Conflicts of Interest in the Business of the
Company" and "--Certain Relationships; Conflicts of Interest."
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST
The Company, on the one hand, and Imperial Credit and its affiliates, on the
other, will enter into a number of relationships other than those governed by
the Management Agreement, some of which may give rise to conflicts of interest.
Moreover, three of the members of the Board of Directors of the Company and all
of its officers are also employed by the Manager or its affiliates.
The relationships between the Company, on the one hand, and Imperial Credit
and its affiliates, on the other, will be governed by policy Guidelines to be
approved by a majority of the Independent Directors. The Guidelines establish
certain parameters for the operations of the Company, including quantitative
and qualitative limitations on the Company's assets that may be acquired. The
Guidelines are to assist and instruct the Manager and to establish restrictions
applicable to transactions with Imperial Credit and its affiliates. A majority
of the Independent Directors will be required to approve the acquisition of the
Initial Investments by the Company from Imperial Credit and SPTL. However,
subsequent to the acquisition of the Initial Investments, the Manager may enter
into transactions on behalf of the Company with Imperial Credit and its
affiliates based upon the Guidelines approved by the Independent Directors.
Such transactions will be reviewed on a quarterly basis to insure compliance
with the Guidelines.
Although the Independent Directors will review the Guidelines periodically
and will monitor compliance with those Guidelines, investors should be aware
that, in conducting this review, the Independent Directors will rely primarily
on information provided to them by the Manager. The Manager may obtain the
prices paid for similar Mortgage Loans and MBS Interests by unrelated third
parties in arms' length purchases and sales (if available) or brokers' opinions
as to the market price for Mortgage Loans and MBS Interests (if the prices paid
by bona fide third parties are not available and such price opinions are
available), and appraisals for Distressed Real Properties purchased from
Imperial Credit or its affiliates, but the Independent Directors are likely to
rely substantially on information and analysis provided by the Manager to
evaluate the Company's Guidelines, compliance therewith and other matters
relating to the Company's investments. Moreover, broker price opinions and
appraisals are not always reliable indicators of the value of assets. In
particular, broker price opinions may be obtained from the underwriter or
placement agent of the MBS, who may have an incentive to overstate the value of
the MBS. Moreover, the market for unregistered MBS is illiquid, and therefore
accurate prices are difficult to estimate. See "Risk Factors--Other Risks--
Conflicts of Interest in the Business of the Company."
If the Independent Directors determine in their periodic review of
transactions that a particular transaction does not comply with the Guidelines,
then the Independent Directors will consider what corrective action, if any,
can be taken. If the transaction is one with Imperial Credit or an affiliate,
and if the Independent Directors so direct, the Manager shall use its best
reasonable efforts to cause Imperial Credit or the relevant affiliate to
repurchase the asset at the purchase price to the Company. Moreover, if
transactions are consummated that materially deviate from the Guidelines, then
the Independent Directors will have the option, under the terms of the
Management Agreement, to terminate the Manager.
The Management Agreement does not limit or restrict the right of the Manager
or any of its officers, directors, employees or other affiliates from engaging
in any business or rendering services of any kind to any other person,
including the purchase of, or rendering advice to others purchasing, real
estate related assets that meet the Company's policies and criteria, except
that the Manager may not manage or advise any REIT or other entity that invests
or intends to invest primarily in commercial and multifamily Mortgage Loans or
subordinated CMBS Interests, and the directors and certain of the executive
officers of the Manager will execute non-compete
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agreements that will preclude them from leaving the Manager and, under certain
circumstances, forming or joining another REIT that invests or intends to
invest primarily in commercial and multifamily Mortgage Loans or subordinated
CMBS Interests.
The Company will acquire (subject to the consent of the Independent
Directors) the Initial Investments from Imperial Credit and SPTL for an
aggregate purchase price of approximately $206 million plus accrued interest,
which will result in a book gain to Imperial Credit and SPTL, subject to the
terms of the definitive agreement to purchase the Initial Investments,
satisfaction of GAAP sale criteria, and consummation of the transaction.
The Company may acquire additional assets from Imperial Credit and its
affiliates in the future. See "Risk Factors" Other Risks--Conflicts of
Interest in the Business of the Company. Any such acquisitions will be in
accordance with the Guidelines to be approved by a majority of the Company's
Independent Directors. The terms of a particular transaction, however, will
not be approved in advance by the Company's Independent Directors in all
cases. The Independent Directors will review any such transactions quarterly
to insure compliance with the Guidelines, but in doing so they, by necessity,
will rely primarily on information and analysis provided to them by the
Manager.
Imperial Credit will purchase 1,980,000 shares of Common Stock on the
Closing Date at a price equal to the public offering price, net of any
underwriting discounts or commissions. This purchase will result in Imperial
Credit's ownership of 9.9% of the total shares offered hereby, exclusive of
the Underwriters' over-allotment option. The Manager also has received stock
options pursuant to the Company's Option Plan. See "Management of Operations--
Stock Options." Imperial Credit will retain its shares of the Company for at
least two years after the Company's initial public offering of shares of
Common Stock, but may dispose of its shares any time thereafter.
Notwithstanding the foregoing, if the Company terminates the Management
Agreement, Imperial Credit may dispose of its shares at that time.
The market in which the Company expects to acquire assets is characterized
by rapid evolution of products and services and, thus, there may in the future
be relationships between the Company, the Manager, and affiliates of the
Manager in addition to those described herein.
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THE COMPANY
ICCMIC was incorporated in the State of Maryland on July 31, 1997 and will
elect to be taxed as a REIT under the Code. The principal executive offices of
the Company are located at c/o Imperial Credit Industries, Inc., 23550
Hawthorne Boulevard, Bldg. One, Suite 110, Torrance, California 90505. The
Company's telephone number is ( ) - .
DIRECTORS AND EXECUTIVE OFFICERS
The following tables set forth certain information about the directors and
executive officers of ICCMIC.
DIRECTORS OF ICCMIC
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
---- --- ----------------
<C> <C> <S>
H. Wayne Snavely........................... 56 Chairman of the Board of Directors
Kevin E. Villani........................... 49 Vice Chairman of the Board of Directors
Mark S. Karlan............................. 38 President and Chief Executive Officer
Four Independent Directors will be elected to the Board prior to the Closing
Date.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Joseph R. Parise........................... 38 Managing Director
Norbert M. Seifert......................... 41 Senior Vice President
</TABLE>
For biographical information on Messrs. Snavely, Villani, Karlan, Parise and
Seifert, see "Management of Operations--The Manager."
All directors will be elected at each annual meeting of ICCMIC's
stockholders for a term of one year, and hold office until their successors
are elected and qualified. All officers serve at the discretion of the Board
of Directors. Although the Company may have salaried employees, it currently
does not have employees and does not expect to employ anyone as long as the
Management Agreement is in force. The Company will pay an annual director's
fee to each Independent Director equal to $20,000, with no additional fee to
be paid for the first four meetings of the Board of Directors. Each
Independent Director will be paid a fee of $1,000 for each additional meeting
of the Board of Directors attended in person by such Independent Director. All
Directors will be reimbursed for their costs and expenses in attending all
meetings of the Board of Directors. In addition, an annual fee of $2,000 will
be paid to any Independent Director who serves as chair of any committee of
the Board. Affiliated directors, however, will not be separately compensated
by the Company.
Directors and executive officers of ICCMIC will be required to devote only
so much of their time to the Company's affairs as is necessary or required for
the effective conduct and operation of the Company's business. Because the
Management Agreement provides that the Manager will assume, subject to the
supervision of the Board of Directors, principal responsibility for managing
the day-to-day affairs of the Company, the officers of the Company, in their
capacities as such, are not expected to devote substantial portions of their
time to the affairs of the Company. However, in their capacities as officers
or employees of the Manager, or its affiliates, they will devote such portion
of their time to the affairs of the Manager as is required for the performance
of the duties of the Manager under the Management Agreement.
The Charter and Bylaws of ICCMIC provide that, except in the case of a
vacancy, the majority of the members of the Board of Directors will at all
times after the issuance of the shares offered hereby be Independent
Directors. Vacancies occurring on the Board of Directors among the Independent
Directors will be filled by the vote of a majority of the directors, including
a majority of the Independent Directors.
ICCMIC's Charter limits the liability of its directors and officers to
ICCMIC and its stockholders to the fullest extent permitted from time to time
by Maryland law. Maryland law presently permits the liability of
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directors and officers to a corporation or its stockholders for money damages
to be limited, except (i) to the extent that it is proved that the director or
officer actually received an improper benefit or profit in money property or
services for the amount of the benefit or profit in money, property or
services actually received, or (ii) if a judgment or other final adjudication
is entered in a proceeding based on a finding that the director's or officer's
action, or failure to act, was the result of active and deliberate dishonesty
and was material to the cause of action adjudicated in the proceeding. This
provision does not limit the ability of ICCMIC or its stockholders to obtain
other relief, such as an injunction or rescission.
The Charter and Bylaws require ICCMIC to indemnify and hold harmless and,
without requiring a determination of the ultimate entitlement to
indemnification, pay reasonable expenses in advance of the final disposition
of any proceeding to its present and former directors and officers and certain
other parties to the fullest extent permitted from time to time by Maryland
law. The Maryland General Corporation Law ("MGCL") permits a corporation to
indemnify its directors, officers and certain other parties against judgments,
penalties, fines, settlements and reasonable expenses incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service to or at the request of the corporation, unless it is
established that (i) the act or omission of the indemnified party was material
to the matter giving rise to the proceeding and (x) was committed in bad faith
or (y) was the result of active and deliberate dishonesty, (ii) the
indemnified party actually received an improper personal benefit in money,
property or services or (iii) in the case of any criminal proceeding, the
indemnified party had reasonable cause to believe that the act or omission was
unlawful. Indemnification may be made against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director or
officer in connection with the proceeding. Indemnification is limited to court
ordered reimbursement for expenses; however, if the proceeding is one by or in
the right of the corporation, and the director or officer was adjudged to be
liable to the corporation or if the proceeding is one charging improper
personal benefit to the director or officer and the director or officer was
adjudged to be liable on the basis that personal benefit was improperly
received. The termination of any proceeding by conviction, or upon a plea of
nolo contendere or its equivalent, or an entry of any order of probation prior
to judgment, creates a rebuttal presumption that the director or officer did
not meet the requisite standard of conduct required for indemnification to be
permitted. Maryland law requires a corporation (unless its charter provides
otherwise, which ICCMIC's Charter does not) to indemnify a director or officer
who has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. It is the position of the Commission that indemnification of
directors and officers for liabilities arising under the Securities Act is
against public policy and is unenforceable pursuant to Section 14 of the
Securities Act.
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DISTRIBUTION POLICY
In order to avoid corporate income taxation on the earnings that it
distributes, ICCMIC must distribute to its stockholders an amount at least
equal to (i) 95% of its REIT taxable income (determined before the deduction
for dividends paid and excluding any net capital gain but including any market
discount) plus (ii) 95% of the excess of its net income from foreclosure
property over the tax imposed on such income by the Code less (iii) any excess
noncash income (as determined under the Code). See "Federal Income Tax
Considerations." The actual amount and timing of distributions, however, will
be at the discretion of the Board of Directors and will depend upon the
financial condition of ICCMIC in addition to the requirements of the Code. It
is anticipated that the first distribution will be made after the first full
fiscal quarter following the completion of this offering.
Subject to the distribution requirements referred to in the immediately
preceding paragraph, ICCMIC intends, to the extent practicable, to invest
substantially all of the principal from repayments, sales and refinancings of
the Company's assets in Mortgage Loans, MBS Interests and the other types of
assets discussed above. ICCMIC may, however, under certain circumstances, make
a distribution of principal. Such distributions, if any, will be made at the
discretion of ICCMIC's Board of Directors.
It is anticipated that distributions generally will be taxable as ordinary
income to non-exempt stockholders of ICCMIC, although a portion of such
distributions may be designated by ICCMIC as long-term capital gain or may
constitute a return of capital. ICCMIC will furnish annually to each of its
stockholders a statement setting forth distributions paid during the preceding
year and their federal income tax status. For a discussion of the federal
income tax treatment of distributions by ICCMIC, see "Federal Income Tax
Considerations--Taxation of the Company", "--Taxation of Taxable U.S.
Stockholders," "Taxation of Tax-Exempt Stockholders" and "Taxation of Non-U.S.
Stockholders."
YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS
Before acquiring any Real Estate Related Assets, the Company, with the
assistance of the Manager, will consider the expected yield of the investment.
The Company considers the expected yield of an investment to be a benchmark
for evaluating profitability of all types of assets over time. "Yield" or
"yield to maturity" is the interest rate that will make the present value of
the future cash flow from an investment equal to its price. Despite the
substantial experience of the employees of the Manager in evaluating potential
yields on Real Estate Related Assets, no assurances can be given that the
Company can make an accurate assessment of the actual yield to be produced by
an asset. Many factors beyond the control of the Company are likely to
influence the yield on the Company's investments, as described in more detail
below, such that the actual yield on an investment may vary substantially from
its expected yield.
MORTGAGE LOANS
The yield to maturity on the Company's investment in Mortgage Loans will
depend, among other things, upon (i) whether there are any losses on such
Mortgage Loans, (ii) whether and when there are any prepayments of such
Mortgage Loans, (iii) the interest rates on such Mortgage Loans, and (iv) the
purchase price of such Mortgage Loans.
The yield to maturity on all Mortgage Loans will be sensitive to defaults by
the borrowers and the severity of the losses that might result from such
defaults. Construction Loans and Mezzanine Loans will be particularly
sensitive to defaults because they generally have higher loan to value ratios
than traditional mortgage loans. The borrower generally will have an equity
investment of 10% to 15% of total project costs, but if the borrower defaults
there can be no assurance that losses will not exceed such amount. Because the
borrower's equity may not be adequate to protect the Company's investment, the
Company's yield on such loans is particularly sensitive to defaults.
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If the Company acquires a Mortgage Loan at a significant discount from its
outstanding principal balance and the Company estimates the yield on the
Mortgage Loan based on a faster rate of payment of principal than actually
occurs, the Company's yield on that Mortgage Loan will be lower than the
Company anticipated. Conversely, if the Company acquires a Mortgage Loan at a
significant premium to its outstanding principal balance, estimating the yield
on such Mortgage Loan based on a slower rate of payment of principal than
actually occurs, the Company's yield on that Mortgage Loan will be lower than
anticipated.
Whether and when there are any principal prepayments 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, tax, legal and other factors.
Principal prepayments on Mortgage Loans secured by multifamily and commercial
properties are likely to be affected by lock-out periods and prepayment
premium provisions applicable to each of the Mortgage Loans, and by the extent
to which the servicer is able to enforce such prepayment premium provisions.
Moreover, the yield to maturity on Mortgage Loans also may be affected by any
extension of the scheduled maturity dates of the Mortgage Loans as a result of
modifications of the Mortgage Loans by the servicer, if permitted.
In addition to acquiring Mortgage Loans, the Company may originate Mortgage
Loans secured by multifamily and commercial Real Properties. The Company will
originate Mortgage Loans only when they are anticipated to achieve the
Company's yield and risk objectives.
MBS INTERESTS
The yield to maturity on any class of MBS Interests will depend upon, among
other things, the price at which such class is purchased, the interest rate
for such class and the timing and aggregate amount of distributions on the
securities of such class, which in turn will depend primarily on (i) whether
there are any losses on the underlying loans allocated to such class and (ii)
whether and when there are any prepayments of the underlying related mortgage
loans (which include both voluntary prepayments by the obligors on the
underlying mortgage loans and prepayments resulting from liquidations due to
defaults and foreclosures).
The yield on the MBS Interests acquired by the Company will be extremely
sensitive to defaults on the mortgage loans comprising the Mortgage Collateral
for such securities and the severity of losses resulting from such defaults,
as well as the timing of such defaults and actual losses. The Company's right
as a holder of subordinated classes of MBS Interests to distributions of
principal and interest will be subordinated to all of the more senior classes
of securities. Actual losses on the Mortgage Collateral (after default, where
the proceeds from the foreclosure sale of the Real Property securing the
Mortgage Collateral are less than the unpaid balance of the mortgage loan plus
accrued interest thereon and disposition costs) will be allocated first to the
subordinated classes of MBS Interests prior to being allocated to the more
senior classes of securities. The subordinated classes of MBS Interests the
Company intends to acquire with the proceeds from this offering are subject to
substantially greater risk of loss of principal and non-payment of interest
than the more senior classes of such securities.
If the Company acquires MBS Interests with an anticipated yield as of the
acquisition date based on an assumed rate of default and severity of loss on
the mortgage loans comprising the Mortgage Collateral that is lower than the
actual default rate and severity of loss, the yield on such MBS Interests will
be lower than the Company initially anticipated. In the event of substantial
losses, the Company may not recover the full amount (or, indeed, any) of its
acquisition cost. The timing of actual losses also will affect the Company's
yield, even if the rate of default and severity of loss are consistent with
the Company's anticipation. In general, the earlier a loss occurs, the greater
the adverse effect on the Company's yield. Additionally, the yield on CMBS and
RMBS collateralized by adjustable rate mortgage loans will vary depending on
the amount of and caps on the adjustments to the interest rates of such
mortgage loans. There can be no assurance as to the rate of default, severity
of loss or the timing of any such losses on mortgage loans underlying MBS
Interests and thus as to the actual yield received by the Company.
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The aggregate amount of distributions on the Company's MBS Interests and
their yield also will be affected by the amount and timing of principal
prepayments on the mortgage loans comprising the Mortgage Collateral. To the
extent that more senior classes are outstanding, all prepayments of principal
on the underlying mortgage loans typically will be paid to the holders of the
more senior classes, and typically none (or very little) will be paid to the
Company as holder of the MBS Interests during the first five years, and in
some cases a longer period, after the original issue date of the MBS. This
subordination of the MBS Interests to more senior classes may affect adversely
the yield on the MBS Interests acquired by the Company. Even if there are no
actual losses on the mortgage loans, interest and principal payments are made
on the more senior classes before interest and principal are paid with respect
to subordinated classes of MBS Interests. Typically, interest deferred on MBS
Interests is payable on subsequent payment dates to the extent funds are
available, but such deferral does not itself bear interest. Such deferral of
interest will reduce the actual yield on the Company's MBS Interests.
Because the Company will acquire MBS Interests at a significant discount
from their outstanding principal balance, if the Company estimates the yield
on a security based on a faster rate of payment of principal than actually
occurs, the Company's yield on that security will be lower than the Company
anticipated. Whether and when there are any principal prepayments on the
underlying 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, tax, legal
and other factors. Principal prepayments on mortgage loans secured by
multifamily and commercial properties are likely to be affected by lock-out
periods and prepayment premium provisions applicable to each of the mortgage
loans, and by the extent to which the servicer is able to enforce such
prepayment premium provisions. Moreover, the yield to maturity on such MBS
Interests also may be affected by any extension of the scheduled maturity
dates of the mortgage loans as a result of modifications of the mortgage loans
by the servicer, if permitted.
The timing of any prepayments on the mortgage loans underlying MBS Interests
owned by the Company may significantly affect the Company's yield to maturity,
even if the average rate of principal payments is consistent with the
Company's expectation. In general, the earlier a prepayment of principal of
the Mortgage Loans, the greater the effect on an investor's yield. The effect
on the Company's yield of principal payments occurring at a rate higher (or
lower) than the rate anticipated by the Company during any particular period
may not be fully offset by a subsequent like decrease (or increase) in the
rate of principal payments.
Because the rate and timing of principal payments on the underlying mortgage
loans will depend on future events and on a variety of factors, no assurances
can be given as to such rate or the timing of principal payments on
subordinated classes of MBS Interests the Company owns or acquires.
IOS, INVERSE IOS AND SUB IOS
The Company's earnings resulting from its investments in IOs, Inverse IOs
and Sub IOs will be extremely sensitive to changes in the prepayment rates on
the underlying mortgage loans, and investments in Inverse IOs will be very
sensitive to changes in the index used to calculate the interest on such
classes.
The yield on IOs declines as prepayments on the underlying mortgage loans
increase. As market interest rates decline, prepayments on the underlying
loans typically increase as borrowers refinance their mortgage loans, although
multifamily and commercial loans typically have provisions that prohibit or
provide disincentives for prepayments for specified periods. Prepayment rates
on mortgage loans on which there is no prepayment penalty or prepayment "lock
out" period (as is typical for single-family residential loans) may be
particularly sensitive to changes in interest rates and, therefore, quite
volatile. Faster than anticipated prepayment rates can result in a loss of
part or all of the purchase price for the IO.
The Company may invest in Inverse IOs, interest on which is payable at a
floating rate that varies inversely with (and often at a multiple of) a
specified index, such as the prime rate, one-month, three-month or six-month
LIBOR, or a U.S. Treasury rate. Generally, if the index exceeds a certain
level, the Inverse IO receives no payments. Moreover, Inverse IOs generally
have a cap on the interest rate payable on such class.
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Investors in Inverse IOs are subject to the risk that higher than
anticipated levels of the index could result in actual yields to investors
that are significantly lower than the anticipated yields, and that the
interest rate on the class will be 0% at or above specified levels of the
index. In addition, the interest rate on an Inverse IO cannot exceed its
specified maximum rate, regardless of the level of the index. Further, high
levels of the index (especially in combination with fast prepayment rates on
the underlying mortgage loans) may result in the failure of the Company to
recover fully its investments in Inverse IOs. For example, the holder of an
Inverse IO with a per annum interest rate equal to 8.5% minus one-month LIBOR,
subject to a maximum rate of 8.5%, would receive no interest if one-month
LIBOR were to equal or exceed 8.5%. Moreover, under no circumstance will such
Inverse IO accrue interest at a rate greater than 8.5% per annum.
Changes in the index may not correlate with changes in mortgage interest
rates. It is possible that lower prevailing mortgage interest rates (which
would be expected to result in faster prepayments) could occur concurrently
with a higher level of the index, thereby compounding the negative effects of
each separate factor on the yields to investors in the Inverse IOs.
Conversely, higher prevailing mortgage interest rates (which would be expected
to result in slower prepayments) could occur concurrently with a lower level
of the index.
It is highly unlikely that the index will remain constant at any level. The
timing of changes in the level of the index may affect the actual yield to the
Company, even if the average level is consistent with the Company's
expectation. In general, the earlier a change in the level of the index, the
greater the effect on the Company's yield. As a result, the effect on the
Company's yield of the index level that is higher (or lower) than the rate
anticipated by the Company during earlier periods is not likely to be offset
by a later equivalent reduction (or increase).
The Company intends to invest in Sub IOs. Interest otherwise allocable to
Sub IOs generally is withheld and used to make payments on more senior classes
or to fund a reserve account for the protection of senior classes until over
collateralization or the balance in the reserve account reaches a specified
level. In those cases, interest on the Sub IO generally will be paid to the
holders of the Sub IO only after the balance in the reserve account reaches
the specified level. Sub IOs of this nature provide credit support to the
senior classes, and thus bear substantial credit risk. Moreover, because a Sub
IO receives only interest payments, its yield is extremely sensitive not only
to default losses but also to changes in the weighted average life of the
class, which in turn is dictated by the rate of prepayments (including as a
result of defaults) on the underlying loans. See "Risk Factors--Risks Related
to Investments in MBS Interests--Prepayment and Interest Rate Risks Related to
Subordinated MBS Interests, IOs and POs."
POS
The Company may invest in POs, which do not provide for payment of periodic
interest, but only provide for payment of the stated principal amount at
maturity or earlier prepayment of the underlying loans. The Company believes
that its POs will be negatively affected by slower than anticipated prepayment
rates. Generally, a rising interest rate environment will result in the
interest rate to be paid by the borrower pursuant to the terms of a fixed rate
loan becoming relatively more favorable to that borrower, decreasing the
likelihood of that borrower making a prepayment on that loan. Slower than
anticipated prepayment rates can result in a significant decrease in the yield
realized by the Company on its investments in POs. See "Risk Factors--Risks
Related to Investments in MBS Interests--Prepayment and Interest Rate Risks
Related to Subordinated MBS Interests, IOs and POs."
REAL PROPERTY
The yield on the Company's investments in Real Property, including
Distressed Real Property, if any, will depend upon the price that the Company
pays for such investments, the costs of capital improvements and other costs
of managing the properties, the level of rents and other income generated by
the properties, the length of time between acquisition and disposition and the
price at which the Company ultimately disposes of such properties. The yield
on such investments may be adversely affected by factors beyond the Company's
control,
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such as adverse changes in economic conditions, neighborhood characteristics
and competition from other properties offering the same or similar services.
See "Risk Factors--Risks Related to Investments in Real Property--Value of
Real Property Dependent on Conditions Beyond Company's Control." No assurances
can be given, however, that the Company will be successful in this endeavor.
INITIAL INVESTMENTS
GENERAL
The Company has contracted (subject to the consent of the Independent
Directors) with SPTL to acquire Mortgage Loans having an aggregate principal
balance of $136 million (the "Initial Mortgage Loans") and certain MBS
Interests, all of which are described below (collectively, the "Initial
Investments"), for an aggregate cash price equal to approximately $206 million
plus accrued interest (74% of the expected net proceeds of this Offering).
The purchase prices to be paid by the Company for the Initial Investments
were derived by considering a number of factors, including the amount and
timing of potential net cash flows, the range of possible returns, and the
risks associated with such Initial Investments, including the risk that the
ultimate return will be significantly affected by losses, if any, realized on
the Initial Mortgage Loans or the mortgage loans underlying the MBS Interests
included in the Initial Investments, and other factors that are not controlled
or controllable by the Company, such as prepayment experience on the
underlying mortgage loans. These factors may result in a below market rate of
return or a loss on the purchase prices paid for the Initial Investments in
certain situations. See "Risk Factors--Risks Related to Investments in MBS
Interests--Credit Risks from Ownership of Subordinated MBS Interests."
Imperial Credit and its affiliates will realize a book gain on the sale of
the Initial Investments to the Company, subject to the terms of the definitive
agreement to purchase the Initial Investments, satisfaction of GAAP sale
criteria, and consummation of the transaction. The sale of the Initial
Investments to the Company will be subject to the consent of the Independent
Directors.
The descriptions of the Initial Investments set forth below are summaries.
In the case of the MBS Interests, they have been taken from the prospectus and
prospectus supplement for each MBS Interest included therein (the "Underlying
Prospectuses") and the servicing reports provided to the Company by the
trustees of the series of MBS Interests included therein (the "Reports"). Such
information with respect to the MBS Interests, which is peculiarly within the
control of the trustee, services and issuers of such securities, has not been
independently confirmed by the Company, the Manager or the Underwriters, and
is all the information on the subject that the Company possesses or can
acquire without unreasonable effort or expense.
THE INITIAL MORTGAGE LOANS
GENERAL. The Initial Mortgage Loans will have original terms to maturity of
not more than 360 months. Each of those Initial Mortgage Loans is secured by a
first lien mortgage or deed of trust (each, a "Mortgage") on multifamily,
retail, office industrial, hotel, mixed use or other commercial Real Property.
The Initial Mortgage Loans were originated primarily by SPTL and will be sold
to the Company immediately after the consummation of this Offering. SPTL will
retain and perform the primary servicing of the Initial Mortgage Loans on
behalf and at the direction of the Company.
See Annex A for additional information with respect to the Initial Mortgage
Loans.
REPRESENTATIONS AND WARRANTIES. SPTL will represent and warrant as of the
Closing Date of this Offering with respect to each Initial Mortgage Loan that,
among other things, (i) such Initial Mortgage Loan is secured by a Mortgage
that is a valid and subsisting first priority lien on the Real Property
purported to be encumbered thereby (each such Real Property is referred to as
a "Mortgaged Property") free and clear of any liens, claims or encumbrances,
subject only to certain permitted encumbrances; (ii) such Mortgage, together
with any separate security agreements, establishes a perfected first priority
security interest in favor of the holder of the Mortgage in all the related
mortgagor's personal property used in, and reasonably necessary to operate,
the Mortgaged Property and, to the extent a security interest may be created
therein, the proceeds arising from the
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Mortgaged Property and any other collateral securing such Mortgage subject
only to certain permitted encumbrances; (iii) there is an assignment of leases
and rents provision creating a perfected first priority security interest in
leases and rents arising in respect of the related Mortgaged Property, subject
only to certain permitted encumbrances; (iv) there are no mechanics' or
similar liens affecting the Mortgaged Property which are or may be prior or
equal to the lien of the Mortgage, except those insured against pursuant to
the applicable title insurance policy; (v) the related mortgagor has good and
indefeasible title to, and no person has any outstanding exercisable rights of
record with respect to the purchase or sale of all or a portion of, the
related Mortgaged Property; (vi) the Mortgaged Property is covered by a title
insurance policy insuring that the Mortgage is a valid and perfected first
lien, subject only the certain permitted encumbrances (vii) no claims have
been made under the related title insurance policy and such policy is in full
force and effect and will provide that the insured includes the owner of the
Initial Mortgage Loan; (viii) at the time of the assignment of such Initial
Mortgage Loan to ICCMIC, SPTL had good title to and was the sole owner of such
Initial Mortgage Loan free and clear of any pledge, lien or encumbrance and
such assignment validly transferred ownership of such Initial Mortgage Loan to
ICCMIC free and clear of any pledge, lien or encumbrance; (ix) the related
assignment of mortgage and related assignment of rents and leases is legal,
valid and binding and has been recorded or submitted for recording in the
applicable jurisdiction; (x) SPTL's endorsement of the promissory note or
other evidence of indebtedness secured by the related Mortgage (such
promissory note or other evidence of indebtedness is referred to as a
"Mortgage Note") constitutes the legal and binding assignment of such Mortgage
Note and together with an assignment of mortgage and the assignment of the
assignment of leases and rents, legally and validly conveys all right, title
and interest in such Initial Mortgage Loan and related Initial Mortgage Loan
documents to ICCMIC; (xi) each Initial Mortgage Loan document is a legal,
valid and binding obligation of the parties thereto, enforceable in accordance
with its terms, except as the enforceability thereof may be limited by
applicable state law and bankruptcy, insolvency, reorganization or other loss
relating to creditors' rights and general equitable principles, and certain
provisions of such Initial Mortgage Loan documents are and may be
unenforceable in whole or in part, but the inclusion of such provisions does
not render the Initial Mortgage Loan documents invalid as a whole, and such
Initial Mortgage Loan documents taken as a whole are enforceable to the extent
necessary and customary for the practical realization of the rights and
benefits purported to be afforded thereby; (xii) such Initial Mortgage Loan is
not, as of the date of its sale to ICCMIC, and has not been at any time during
the 12 preceding months, more than 60 days delinquent or more than 30 days
delinquent more than one time in payments of principal or interest; (xiii)
SPTL has not modified the terms of the related Initial Mortgage Loan and the
related Initial Mortgage Loan documents have not been modified or waived in
any material respect except as disclosed in writing to the Company; (xiv) such
Initial Mortgage Loan has not been satisfied, cancelled, subordinated,
released or rescinded and the related mortgagor has not been released from any
of its obligations under any Initial Mortgage Loan documents; (xv) none of the
Initial Mortgage Loan documents is subject to any right of rescission, set-
off, valid counterclaim or defense, (xvi) each Initial Mortgage Loan document
complied in all material respects with all material applicable state or
federal laws, including usury laws; (xvii) the related Mortgaged Property is,
in all material respects, in compliance with, and is used and occupied in
accordance with, applicable laws; (xviii) the related Mortgaged Property is in
good repair and no condemnation proceedings with respect thereto are pending;
(xix) all property taxes and premiums for all insurance policies required to
be maintained pursuant to the related Mortgage with respect to each Mortgaged
Property have been paid to the extent such amounts have become due; (xx) if so
indicated to the Company in writing with respect to such Initial Mortgage
Loan, either an environmental site assessment was prepared in connection with
the origination of such Initial Mortgage Loan or SPTL reviewed a compilation
of data bases made available by several regulatory agencies constructed by a
private service with respect to an area within a certain radius surrounding
the related Mortgaged Property, and no such assessment or review revealed any
known circumstances or conditions and SPTL has no knowledge of any
circumstances or conditions with respect to such Mortgaged Property (including
any Mortgaged Property with respect to which neither an assessment was
prepared nor a review was performed as described above), that would constitute
or result in a material violation of any environmental laws or require any
expenditure material in relation to the principal balance of such Initial
Mortgage Loan to achieve or maintain compliance in all material respects with
any environmental laws; (xxi) the Mortgaged Property is covered by insurance
policies providing insurance against certain losses or damage; (xxii) all
amounts required to be deposited by the mortgagor at origination of such
Initial Mortgage Loan have been deposited; (xxiii) to SPTL's
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best knowledge, all significant leases are in full force and effect, and there
have been no material default by the related Mortgagor or lessee; and (xxiv)
to SPTL's best knowledge, there are no pending or threatened actions, suits or
proceedings by or before any court or other governmental authority against or
effecting the related mortgagor under such Initial Mortgage Loan or the
Mortgaged Property which, if determined against such mortgagor or Mortgaged
Property, would materially and adversely affect the value of such Mortgaged
Property or the ability of the mortgagor to pay principal, interest and other
amounts due under such Mortgaged Loan.
SPTL will agree to cure any breach of the foregoing representations and
warranties or to repurchase any Initial Mortgage Loans from the Company as to
which there exists any breach of any such representations or warranties that
materially and adversely affects the interests of the Company therein. SPTL
will covenant with the Company to repurchase any such Initial Mortgage Loan
from the Company or cure any such breach within 90 days of receiving notice
thereof. The sole remedy available to the Company is the obligation of SPTL to
cure or repurchase any Initial Mortgage Loan in connection with which there
has been a breach of any such representation or warranty which materially and
adversely affects the interest of the Company in such Initial Mortgage Loan.
In addition, Imperial Credit will represent as of the Closing Date to the
Company that there are no circumstances or conditions with respect to any
Mortgaged Property that would constitute or result in a material violation of
any environmental laws or require an expenditure material in relation to the
principal balance of the related Initial Mortgage Loan to achieve or maintain
compliance in all material respects with any environmental laws. Imperial
Credit will agree to purchase from the Company (within 30 days of receiving
notice thereof) any Initial Mortgage Loan as to which there exists a breach of
such representation that materially and adversely affects the interests of the
Company in such Initial Mortgage Loan. There can be no assurance that Imperial
Credit will be able to purchase any or all such Initial Mortgage Loans
following any such breach.
CERTAIN CHARACTERISTICS OF THE INITIAL MORTGAGE LOANS. The due dates for
most of the Initial Mortgage Loans occur on the first day of a calendar month.
All of those Initial Mortgage Loans are secured by perfected first priority
liens on the related Mortgaged Properties. Substantially all of the Mortgaged
Properties are not owner-occupied. As of June 25, 1997 (the "Cut-Off Date"),
no Initial Mortgage Loan was more than 30 days delinquent, and no Initial
Mortgage Loan had, at any time during the 12 months preceding the Cut-Off
Date, been more than 60 days delinquent or more than 30 days delinquent more
than one time in payments of principal or interest. In addition, as of the
Cut-Off Date, the Initial Mortgage Loans had the additional characteristics
set forth in Annex A.
UNDERWRITING GUIDELINES
SPTL has represented to the Company that all of the Mortgage Loans were
underwritten pursuant to its Multifamily and Commercial Lending Program. SPTL
began underwriting mortgage loans in accordance with such standards in
February 1994. Typically, the multifamily loans are 30 year term fully
amortizing loans secured by 5 to 164 unit apartment buildings and the
commercial loans are 30 year term fully amortizing loans secured by office
buildings, shopping centers, mobile home parks, industrial properties and
other approved property types. Mortgage loans underwritten pursuant to the
Multifamily and Commercial Lending Program have maximum loan amounts and LTV's
and minimum DSCR's which are determined from time to time by the Loan
Committee of the Board of Directors of SPTL. Appraisals and field inspections
(performed by outside and certified inspectors) and title insurance are
required for each multifamily and commercial loan.
Under the Multifamily and Commercial Lending Program standards presently in
effect, the maximum loan amount is generally $3,000,000, the maximum LTV is
75% of the appraised value of the mortgaged property for multifamily loans and
70% for commercial loans, and the minimum DSCR is 1.15 to 1.00, based on the
applicable level of the related index and the related Note Margin, for
multifamily loans, 1.25 to 1.00, based on the applicable level of the related
index and the related Note Margin, for commercial loans secured by properties
in California, and 1.20 to 1.00, based on the applicable level of the related
index and the related Note Margin. However, senior management may approve a
higher loan amount, a lower DSCR or a higher LTV if it is
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determined that borrower has. a strong financial position, good credit and
good property management skills and/or pledges additional collateral. With
respect to mortgage loans secured by seasoned multifamily properties, either
80% of the living units (or the higher level necessary to cover debt service
and pay all other expenses) must be occupied at rent levels that support the
appraised value of the mortgaged property, or an appropriate holdback of loan
proceeds must be established until the required occupancy level is met. For
newly constructed properties, a lower occupancy level may be approved by the
Loan Committee.
SPTL's underwriting standards under the Multifamily and Commercial Lending
Program are primarily intended to assess the economics of the mortgaged
property and the financial capabilities, credit standing and managerial
ability of the borrower. In determining whether a loan should be made, SPTL
considers, among other things, the creditworthiness of the mortgagor, the
borrower's income, liquid assets and liabilities, the borrower's management
experience, DSCRs, the borrower's overall financial position and the adequacy
of such property as collateral for the mortgage loan. While the primary
consideration in underwriting a mortgage loan is the property securing the
mortgage loan, sufficient documentation on the borrower is required to
establish the financial strength and ability of the borrower to successfully
operate the property and meet its obligations under the note and deed of
trust. The majority of the mortgage loans originated by SPTL provide for
recourse against the related borrower.
The Multifamily and Commercial Lending Program requires that the property
and records regarding the property are inspected to determine the number of
units that can be rebuilt under current zoning requirements, the number of
buildings on the property, the type of construction materials used, the
proximity of the property to natural hazards, flood zones and fire stations
and whether there are any environmental factors and whether a tract map has
been recorded. The property must front on publicly dedicated and maintained
streets with provisions for adequate and safe ingress and egress. Properties
that share ingress and egress through an easement or private road must have a
recorded non-exclusive easement. Recreational facilities and amenities, if
any, must be located on site and be under the exclusive control of the owner
of the premises. If available, engineering reports concerning the condition of
the major building components of the property are reviewed as is a ground
lease analysis if the property is on leased ground. Also, the title is
reviewed to determine if there are any covenants, conditions and restrictions,
easements or reservations of mineral interests in the property. The properties
are appraised by independent appraisers approved by SPTL.
In addition to the considerations set forth above, with respect to Mortgage
Loans secured by commercial properties, SPTL's lending policies typically
require that the commercial usage is permitted under local zoning and use
ordinances and the utilization of the commercial space is compatible with the
property and neighborhood. If the commercial property is an office building,
the office building must have an excellent occupancy history, must be located
in a good office market area and in a conforming neighborhood, must have on-
site parking and must be fire sprinkler equipped according to zoning codes.
Industrial properties must be located in a conforming industrial marketplace
and may not be used for the production, storage or treatment of toxic waste.
Retail properties must be highly visible and located on a heavily traveled
thoroughfare and typically have tenants on term leases. SPTL may not make a
loan secured by a property that has any of the following characteristics:
inadequate maintenance or repairs as determined by SPTL, the property is
subject to covenants, conditions and restrictions unacceptable to SPTL,
existence of or potential for hazardous geological conditions, the property is
not to code or the cost of restoring the property to code is prohibitive or
existence of or potential for contamination by hazardous toxic materials.
SPTL analyzes the financial statements of the borrower to determine the
borrower's equity position, particularly as it relates to real estate mortgage
demands on equity. If the borrower's holdings are heavily encumbered so that
the debt service requirements consume a high percentage of the rental income
from the mortgaged property, or consist substantially of unimproved or
underimproved properties having little or no gross income, SPTL analyzes
whether the borrower will be able to meet all of the mortgaged property's loan
obligations (expenses, debt service and equity return). In addition to DSCRs,
the borrower's income and expense ratios are calculated.
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In addition to the income from the mortgaged property, SPTL also evaluates
the borrower's income as a possible secondary source of repayment for the
mortgage loan. In analyzing such income, SPTL considers, among other factors,
employment or business history of the borrower and the stability and
seasonality of the borrower's current employment or business. If the borrower
derives income from rental property, SPTL evaluates the experience of the
manager of the rental property, type of tenancy and the cash flow generated by
the borrower's real estate portfolio. SPTL also reviews the borrower's credit
history to determine the borrower's ability and willingness to repay debts. In
general, SPTL will not make a mortgage loan to a borrower who has a history of
slow payments or delinquencies, bankruptcies, collection actions, foreclosures
or judgments against the borrower without adequate explanations and
verifications.
INITIAL MBS INTERESTS
GENERAL. ICCMIC will purchase the MBS Interests immediately after the
consumation of this Offering (those MBS Interests are referred to as the
"Initial MBS Interests") for an aggregate cash price equal to approximately to
$60 million plus accrued interest, representing 21.4% of the expected net
proceeds of this Offering.
JPM SERIES 1997-SPTL-C1, CLASSES E, F, G, H, NR AND X
The Initial Investments include J.P. Morgan Commercial Mortgage Finance
Corp., Commercial Mortgage Pass-Through Certificates, Series 1997-SPTL-C1,
Class E, Class F, Class G, Class H, and Class NR (the "JPM Subordinated
Interests"), and Class X (the "JPM IO," and, together with the JPM
Subordinated Interests, the "JPM Investments"), which were issued on June 27,
1997. The JPM Investments and the SPTL Investments, hereinafter defined, are
referred to herein as the "Initial MBS Investments." The securities to be
purchased represent 100% of the outstanding principal balance of each class
purchased, except that the Company is purchasing $[ ] in notional amount of
Class X, which represents approximately [ ]% of such class. The JPM
Investments were acquired by Imperial Credit and SPTL in June of 1997, have a
book value as of [ ], 1997 of approximately $[ ] million, and will be
acquired by the Company for approximately $[ ] million plus accrued
interest.
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The following table shows each class of MBS issued as part of JPM Series
1997-SPTL-C1, including the JPM Subordinated Interests and JPM IO, as well as
other classes of MBS that are not being sold to the Company. The table
indicates the interest rate at which interest accrues on each class (the
"Pass-Through Rate"), the principal balance as of June 27, 1997 (the "Initial
Principal Balance") and the principal balance as of July 1, 1997. Only Classes
E, F, G, H, NR and X are being sold to the Company.
JPM, SERIES 1997-SPTL-C1
CLASSES E, F, G, H, NR AND X
<TABLE>
<CAPTION>
PRINCIPAL
PASS- INITIAL PRINCIPAL BALANCE AS OF
DESIGNATION THROUGH RATE BALANCE JULY 1, 1997
----------- ------------ ----------------- -------------
<S> <C> <C> <C>
Class A1 Securities(1)........ (2) $ 81,230,000 $
Class A2 Securities(1)........ (2) 60,922,000
Class B Securities(1)......... (2) 10,153,000
Class C Securities(1)......... (2) 12,184,000
Class D Securities(1)......... (2) 10,153,000
JPM IO:
Class X Securities............ (3) (3) (3)
JPM SUBORDINATED INTERESTS:
Class E Securities............ 6.50% 10,153,000
Class F Securities............ 6.50% 6,092,000
Class G Securities............ 6.50% 2,030,000
Class H Securities............ 0 3,046,000
Class NR Securities........... 0 7,112,453
Class R-I Securities(1)....... 0 0 0
Class R-II Securities(1)...... 0 0 0
Class R-III Securities(1)..... 0 0 0
------------ -----
Total....................... $ $
============ =====
</TABLE>
- --------
(1) The Class A1, Class A2, Class B, Class C, Class D, Class R-I, Class R-II
and Class R-III Securities are not being sold to the Company.
(2) The Class A1, Class A2, Class B, Class C and Class D Securities accrue
interest at a floating rate that is based on the London interbank offered
rate quotation for U.S. dollar deposits ("LIBOR") subject to a maximum
rate equal to the weighted average of the Remittance Rates on the JPM
Mortgage Loans (as defined below). "Remittance Rate" for any JPM Mortgage
Loan is equal to the excess of the mortgage interest rate thereon over
3.775% per annum.
(3) The Class X Securities accrue interest on the notional balance of such
class, which notional balance is equal to the aggregate of the outstanding
principal balances of all other Classes of Securities, at a rate per anum
equal to the weighted average of the Remittance Rates on the JPM Mortgage
Loans minus the weighted average of the Pass-Through Rates on all the
other Classes of Certificates. As of [ ], 1997, the notional balance
of the Class X Securities is $[ ].
Structure and Subordination. Each of the JPM Subordinated Interests is
subordinated in right of payments of principal and interest and protects the
more senior classes from losses on the related mortgage loans (the "JPM
Mortgage Loans"). Principal distributions on the securities are applied
sequentially, with no principal paid to a class until the outstanding
principal balance of the more senior classes are reduced to zero. Thus, to
date, no principal has been distributed to any of the JPM Subordinated
Interests.
Moreover, the JPM Subordinated Interests provide credit support to the more
senior classes, including the JPM IO. On any distribution date, no interest is
distributed to the JPM Subordinated Interests until principal and
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interest allocable to Classes A1, A2, B, C and D and interest allocable to the
JPM IO for that distribution date has been distributed. Thus, if there are any
losses on the JPM Mortgage Loans, interest otherwise distributable on the JPM
Subordinated Interests will be reduced by the amount of such losses, and that
cash will be used to make principal and interest payments to the more senior
classes. In addition, as losses are incurred on the JPM Mortgage Loans, the
principal balance of Class NR, then Class H, then Class G, then Class F, then
Class E will be reduced, until the outstanding principal balance of each such
class has been reduced to zero.
As of July 31, 1997, there have been no reported realized losses on the JPM
Mortgage Loans, and no JPM Mortgage Loans have been reported to Imperial
Credit as being in default.
JPM Mortgage Loans. The JPM Mortgage Loans, which underlie the JPM 1997-
SPTL-C1 Subordinated Interests, the JPM IO and the other classes of MBS in JPM
Series 1997-SPTL-C1, are monthly-pay, variable rate, mortgage loans with an
initial aggregate principal balance of $203,075,453 and an aggregate principal
balance as of [ ], 1997, of $[ ]. The Mortgage Loans are secured by
first liens on [540] multifamily, retail, office, industrial, mixed use or
other commercial properties (the "JPM Mortgaged Properties"). All of the JPM
Mortgage Loans were originated by SPTL and were underwritten using guidelines
substantially similar to the guidelines set forth in the SPTL Multifamily and
Commercial Lending Program, as described under "--The Initial Mortgage Loans--
Underwriting Guidelines." At origination, most of the JPM Mortgage Loans had
thirty year terms and bore interest at an adjustable interest rate that was
subject to periodic interest rate adjustments. 300 of the Mortgage Loans,
representing 55.56% of the JPM Mortgage Loans as of [ ], 1997 by principal
balance, are secured by Mortgaged Properties located in California. [When the
JPM Investments were originally issued, they were secured by 540 JPM Mortgage
Loans. However, [ ] JPM Mortgage Loans have prepaid in full, leaving only
[ ] JPM Mortgage Loans in the pool.] The following table sets forth certain
information, obtained from the servicer of the JPM Mortgage Loans, about the
JPM Mortgaged Properties, as of [ ], 1997, except as otherwise indicated.
CERTAIN CHARACTERISTICS OF THE JPM MORTGAGE LOANS
The due dates for most of the JPM Mortgage Loans occur on the first day of
each month. All of the JPM Mortgage Loans are secured by first liens on fee
simple interests in the related JPM Mortgaged Properties. Approximately 9.0%
of the JPM Mortgaged Properties are owner-occupied. As of June 1, 1997, the
JPM Mortgage Loans had characteristics set forth in Annex B.
The JPM Mortgage Loans are being serviced by Midland Loan Services, L.P., as
master servicer and special servicer and SPTL as sub-servicer, and the trustee
for the series is LaSalle National Bank. See "Servicing of the Mortgage
Loans."
Restrictions on Transfer of JPM Subordinated Interests. Although the JPM IO
has been registered with the Commission, the JPM Subordinated Interests have
not been registered under the Securities Act or any state securities laws,
and, accordingly, transfer of the JPM Subordinated Interests is restricted.
Moreover, the JPM Subordinated Interests cannot be transferred to a Plan or
Plan investor except in certain limited circumstances. As a result, there is
no liquid market for the JPM Subordinated Interests.
Ratings. The Class X Securities are rated "AAA" by Duff & Phelps Credit
Rating Co. ("DCR") and "AAA" by Fitch Investors Service, L.P. ("Fitch"). The
Class E Securities are rated "BB+" by DCR, "BB" by Fitch and "BB" by Standard
& Poor's Ratings Service ("S&P"). The Class F Securities are rated "B" by DCR,
"BB" by Fitch and "B+" by S&P. The Class G Securities are rated "B-" by DCR,
and the Class H Securities are rated "B" by DCR. The Class NR Securities are
unrated.
The ratings of the Rating Agencies on mortgage pass-through certificates
address the likelihood of the receipt of all distributions to which such
holders are entitled. The ratings do not represent any assessment of (i) the
likelihood or frequency of principal prepayments on the JPM Mortgage Loans,
(ii) the degree to which such prepayments might differ from those originally
anticipated or (iii) whether and to what extent yield maintenance
63
<PAGE>
premiums will be received. Also, a security rating does not represent any
assessment of the yield to maturity that investors may experience on any Class
of JPM Investments nor does it assess any possibility that the holders of the
JPM IO might not fully recover their investment in the event of rapid
prepayments of the JPM Mortgage Loans (including both voluntary and
involuntary prepayments). 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 assigning the rating agency. The ratings assigned to the JPM IO should
be evaluated independently of similar ratings assigned to securities that have
a principal balance.
SPTL, SERIES 1996-C1, CLASSES E, F, NR, A1X, D1X AND NRX
The Initial Investments also include Southern Pacific Thrift and Loan
Association, Commercial Mortgage Pass-Through Certificates, Series 1996-C1,
Class E, Class F and Class NR (the "SPTL Subordinated Interests"), Class A1X
(the "SPTL Senior IO") and Class DX and Class NRX (the "SPTL Subordinated
IOs," and, together with the SPTL Subordinated Interests and the SPTL Senior
IO, the "SPTL Investments"), which were issued on September 30, 1996. The
securities to be purchased represent 100% of the outstanding principal balance
(or notional balance) of each class purchased. The SPTL Investments were
acquired by [ ] in September of 1996, have a book value as of
[ ], 1997 of approximately $[ ] million, and will be acquired by the
Company for approximately $[ ] million plus accrued interest.
The following table shows each class of MBS issued as part of SPTL Series
1996-C1, including the SPTL Subordinated Interests, the SPTL Senior IO and the
SPTL Subordinated IOs, as well as other classes of MBS that are not being sold
to the Company. The table indicates the interest rate at which interest
accrues on each class (the "Pass-Through Rate"), the principal balance as of
September 30, 1996 (the "Initial Principal Balance") and the principal balance
as of June 1, 1997. Only Classes A1X, DX, E, F, NR and NRX are being sold to
the Company.
SPTL, SERIES 1996-C1
CLASSES A1X, DX, E, F, NR AND NRX
<TABLE>
<CAPTION>
PASS- PRINCIPAL
THROUGH INITIAL PRINCIPAL BALANCE AS OF
DESIGNATION RATE BALANCE JULY 25, 1997
----------- ------- ----------------- -------------
<S> <C> <C> <C>
Class A1 Securities(1)............ (2) $111,692,000 $92,548,579
Class A2 Securities(1)............ (2) 76,788,000 76,161,000
Class B Securities(1)............. (2) 19,546,000 19,386,000
Class C Securities(1)............. (2) 18,150,000 18,001,000
Class D Securities(1)............. (2) 13,961,000 13,847,000
SPTL SENIOR IO:
Class A1X Securities.............. (3) (3) (3)
SPTL SUBORDINATED IOS:
Class DX Securities............... (4) (4) (4)
Class NRX Securities.............. (5) (5) (5)
SPTL SUBORDINATED INTERESTS:
Class E Securities................ (6) 12,565,000 12,462,000
Class F Securities................ (6) 11,169,000 11,078,000
Class NR Securities............... (7) 15,360,931 15,135,383
Class R-I Securities(1)........... 0 0 0
Class R-II Securities(1).......... 0 0 0
Class R-III Securities(1)......... 0 0 0
</TABLE>
64
<PAGE>
- --------
(1) The Class A1, Class A2, Class B, Class C, Class D, Class R-I, Class R-II
and Class R-III Securities are not being sold to the Company.
(2) The Class A1, Class A2, Class B, Class C and Class D Securities accrue
interest at a floating rate that is based on LIBOR subject to a maximum
rate equal to the weighted average of the Remittance Rates on the SPTL
Mortgage Loans (as defined below). "Remittance Rate" for any SPTL Mortgage
Loan is equal to the excess of the mortgage interest rate thereon over
3.7375% per annum.
(3) The Class A1X Securities accrue interest on the notional balance of such
class, which notional balance is equal to the outstanding principal
balances of the Class A1 Securities for the related distribution date, at
a rate per anum equal to the excess of (i) the weighted average by stated
principal balance, of the Remittance Rates on the SPTL Mortgage Loans over
(ii) the Pass-Through Rate on the Class A1 Securities. As of June 1, 1997,
the notional balance of the Class A1X Securities is $92,548,579.
(4) The Class DX Securities consist of the Class A2X, Class BX, Class CX and
Class DX Components. The notional balance of the Class A2X, Class BX,
Class CX and Class DX Components is equal to the class balance of the
Class A2, Class B, Class C and Class D Securities, respectively. The Class
A2X, Class BX, Class CX and Class DX Components accrue interest on the
notional balance of such class, at a rate per anum equal to the weighted
average by stated principal balance of the Remittance Rates on the SPTL
Mortgage Loans minus the weighted average of the Pass-Through Rates on the
Class A2, Class B, Class C and Class D Securities. As of [ ], 1997,
the notional balance of the Class A2, Class BX, Class CX and Class DX
Components is $76,161,000, $[ ], $[ ] and $127,395,000, respectively
and $[ ] has been distributed as interest on the Class DX Securities
since issuance.
(5) The Class NRX Securities consist of the Class EX, Class FX and Class NRX
Components. The notional balance of the Class EX, Class FX and Class NRX
Components is equal to the class balance of the Class E, Class F and Class
NR Securities, respectively. The Class EX, Class FX and Class NRX
Components accrue interest on the notional balance of such class, at a
rate per anum equal to 1.5%, 1.5% and 3.0%, respectively. As of [ ],
1997, the notional balance of the Class EX, Class FX and Class NRX
Components is $[ ], $[ ] and $38,675,383, respectively.
(6) The Class E and Class F Securities accrue interest at a floating rate per
annum equal to the excess of (i) the weighted average by stated principal
balance Remittance Rate for such distribution date over (ii) 1.5%.
(7) The Class NR Securities accrue interest at a floating rate per annum equal
to the excess of (i) the weighted average by stated principal balance
Remittance Rate for such distribution date over (ii) 3.0%.
Structure and Subordination. Each of the SPTL Subordinated Interests is
subordinated in right of payments of principal and interest and protects the
more senior classes from losses on the related mortgage loans (the "SPTL
Mortgage Loans"). Principal distributions on the securities are applied
sequentially, with no principal paid to a class until the outstanding
principal balance of the more senior classes are reduced to zero. Thus, to
date, no principal has been distributed to any of the SPTL Subordinated
Interests.
Moreover, the SPTL Subordinated Interests and SPTL Subordinated IOs provide
credit support to the more senior classes, including the SPTL Senior IO. On
any distribution date, no interest is distributed to the SPTL Subordinated
Interests and SPTL Subordinated IOs until principal and interest allocable to
Classes A1, A1X, A2, B, C and D for that distribution date has been
distributed. Thus, if there are any losses on the SPTL Mortgage Loans,
interest otherwise distributable on the SPTL Subordinated Interests and SPTL
Subordinated IOs will be reduced by the amount of such losses, and cash will
be used to make principal and interest payments to the more senior classes. In
addition, as losses are incurred on the SPTL Mortgage Loans, the principal
balance of Class NR, then Class F, then Class E will be reduced, until the
outstanding principal balance of each such class has been reduced to zero.
As of June 1, 1997, there have been no reported realized losses on the SPTL
Mortgage Loans, and no SPTL Mortgage Loans have been reported to Imperial
Credit as being in default.
65
<PAGE>
SPTL Mortgage Loans. The SPTL Mortgage Loans, which underlie the SPTL 1996-
C1 Subordinated Interests, the SPTL Senior IO, the SPTL Subordinated IOs and
the other classes of MBS in SPTL Series 1996-C1, are monthly-pay, variable
rate, mortgage loans with an initial aggregate principal balance of
$279,232,031 and an aggregate principal balance as of July 25, 1997, of
$258,618,962. The SPTL Mortgage Loans are secured by first liens on 855
multifamily, retail, office, industrial, mixed use or other commercial
properties (the "SPTL Mortgaged Properties"). Most of the SPTL Mortgage Loans
were originated by SPTL, and most of the remaining SPTL Mortgage Loans were
originated by several lending institutions and purchased by SPTL from Fremont
General Insurance or an affiliate thereof. All of the SPTL Mortgage Loans were
originated using guidelines substantially similar to the guidelines set forth
in the SPTL Multifamily and Commercial Lending Program, as described under "--
The Initial Mortgage Loans--Underwriting Guidelines." At origination, most of
the SPTL Mortgage Loans had thirty year terms and bore interest at an
adjustable interest rate that was subject to periodic interest rate
adjustments. $190,408,475 of the SPTL Mortgage Loans, representing 73.60% of
the SPTL Mortgage Loans as of July 25, 1997 by principal balance, are secured
by SPTL Mortgaged Properties located in California. [When the SPTL Investments
were originally issued, they were secured by 855 SPTL Mortgage Loans. However,
53 SPTL Mortgage Loans have prepaid in full, leaving only 802 SPTL Mortgage
Loans in the pool.
The SPTL Mortgage Loans are being serviced by Midland Loan Services, L.P.,
as master servicer and special servicer and SPTL as sub-servicer, and the
trustee for the series is LaSalle National Bank. See "Servicing of Morgage
Loans."
Restrictions on Transfer of SPTL Subordinated Interests. The SPTL
Investments have not been registered under the Securities Act or any state
securities laws, and, accordingly, transfer of the SPTL Investments is
restricted. Moreover, the SPTL Investments cannot be transferred to a Plan or
Plan investor except in certain limited circumstances. As a result, there is
no liquid market for the SPTL Investments.
Ratings. The Class A1X Securities are rated "AAA" by DCR. The Class DX
Securities are rated "BBB" by DCR. The Class E Securities are rated "BB" by
DCR. The Class F Securities are rated "B" by DCR. The Class NR and NRX
Securities are unrated.
The ratings of the rating agencies on mortgage pass-through certificates
address the likelihood of the receipt of all distributions to which such
holders are entitled. The ratings do not represent any assessment of (i) the
likelihood or frequency of principal prepayments on the SPTL Mortgage Loans,
(ii) the degree to which such prepayments might differ from those originally
anticipated or (iii) whether and to what extent yield maintenance premiums
will be received. Also, a security rating does not represent any assessment of
the yield to maturity that investors may experience on any Class of SPTL
Investments nor does it assess any possibility that the holders of the SPTL
Senior IO and the SPTL Subordinated IOs might not fully recover their
investment in the event of rapid prepayments of the SPTL Mortgage Loans
(including both voluntary and involuntary prepayments). 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 assigning the rating agency. The ratings
assigned to the SPTL Senior IO and SPTL Subordinated IOs should be evaluated
independently of similar ratings assigned to securities that have a principal
balance.
66
<PAGE>
YIELD CONSIDERATIONS RELATED TO THE INITIAL MBS INTERESTS
GENERAL
The actual yield to maturity on the Initial MBS Interests will depend upon,
among other things, the interest rates on the Mortgage Collateral underlying
the Initial MBS Interests. The actual yield also will be dependent on the
timing and aggregate amount of distributions on each class of MBS Interests,
which in turn will depend primarily on losses and prepayments on the related
mortgage loans. See "Yield Considerations Related to the Company's
Investments."
INITIAL SUBORDINATED INTERESTS
The yield to maturity on the JPM Subordinated Interests and the SPTL
Subordinated Interests (collectively, the "Initial Subordinated Interests")
will be extremely sensitive to the default and loss experience of the
underlying Mortgage Collateral and the timing of any such defaults or losses.
See "Risk Factors--Credit Risks of Subordinated MBS Interests" and "Yield
Considerations Related to the Company's Investments."
The significance of the effect of potential Realized Losses on the Mortgage
Loans is illustrated in the following tables. This information is presented
for analytical purposes only, and is not intended as an accurate indicator or
prediction of the actual defaults and losses that may occur in the future with
respect to the Mortgage Loans. Actual defaults, liquidations and losses are
likely to differ in timing and amount from those assumed (and may differ
significantly). Investors in the Company are urged to consider their own
estimates as to possible levels and timing of defaults and losses.
The Company will purchase each class of Initial Subordinated Interests at a
discount from its principal amount. Accordingly, if the Company calculates the
anticipated yield to maturity of any such class based on an assumed rate of
payment that is faster than that actually experienced on the Mortgage Loans,
the actual yield may be lower than that so calculated.
MODELING ASSUMPTIONS
Yield Table for the JPM Subordinated Interests
The following table, regarding the JPM Subordinated Interests, indicates the
pre-tax yield to maturity and the weighted average lives that would be
produced by the specified percentages of constant prepayment ("CPR"), Mortgage
Loan annual default rates (the "Conditional Default Rates") and loss
severities, assuming the indicated purchase price and the following additional
assumptions. There can be no assurance that these assumptions are reasonable
or that additional or different assumptions should not be made to determine
potential yields on these investments.
(i) The JPM Mortgage Loans prepay at the indicated percentage of CPR;
(ii) The maturity date of each of the Balloon Mortgage Loans is not
extended;
(iii) Distributions on the JPM Subordinated Interests are received in
cash, on the 25th day of each month, commencing in [ ] 1997;
(iv) No defaults or delinquencies in, or modifications, waivers or
amendments respecting, the payment by the mortgagors of principal and
interest on the JPM Mortgage Loans occur;
(v) Prepayments represent payment in full of individual JPM Mortgage Loans
and are received on the respective due dates and include a month's
interest thereon;
(vi) There are no repurchases of JPM Mortgage Loans due to breaches of any
representation and warranty or pursuant to an optional termination
otherwise;
(vii) The JPM Subordinated Interests are purchased on [ ], 1997;
(viii) The purchase price is [ ]% for the Class E Certificates, [ ]% for
the Class F Certificates, [ ]% for the Class G Certificates, [ ]%
for the Class H Certificates and [ ]% for the Class NR
67
<PAGE>
Certificates, plus in each case accrued interest from [ ], 1997 to
but not including an assumed date of purchase of [ ], 1997;
(ix) All required payments are made during the applicable collection
periods, except for balances which are assumed to be in default;
(x)All necessary principal and interest advances will be made;
(xi) Liquidation of the principal balance assumed to be in default (the
"Default Balance") occurs 6 months after assumed default;
(xii) Upon liquidation, 70%, 60%, or 50% (the inverse of the indicated
loss severity) of the Default Balance, less any amount in respect of
principal previously received as a result of principal and interest
advances made following assumed default, is recovered;
(xiii) No amounts will be available on future distribution dates to cover
interest shortfalls in prior periods on the JPM Subordinated
Interests;
(xiv) No mortgagor becomes the subject of a bankruptcy proceeding;
(xv) No special servicing fees are assumed to be incurred; and
(xvi) Upon default, losses of 30%, 40% and 50% (each a "Loss Severity
Percentage"), as indicated, of the Default Balance will be realized
upon liquidation.
The assumed percentages of liquidations and loss severities on the JPM
Mortgage Loans shown in the tables below are for illustrative purposes only
and the Company makes no representation with respect to the reasonableness of
the assumptions or that the actual liquidation and loss severity experience of
the JPM Mortgage Loans will in any way correspond to any of the assumptions.
In addition, it was assumed in preparing the tables that no special servicing
fees or other expenses of the JPM 1997-SPTL-C1 trust fund will be paid, but in
fact defaults and liquidations would result in the payment to the special
servicer of special servicing fees and other expenses of such trust fund,
which payments would reduce the amount available for distribution to one or
more classes of the JPM Subordinated Interests. Consequently, there can be no
assurance that the pre-tax yield to an investor in any class of JPM
Subordinated Interests will correspond to any of the pre-tax yields shown
below.
The following tables generally show higher yields for the JPM in scenarios
involving higher rates of prepayments, primarily because loss percentages are
applied to remaining JPM Mortgage Loan balances rather than original JPM
Mortgage Loan balances. Accordingly, in scenarios with high prepayments,
losses are lower. Contrary to the assumptions above, prepayments are less
likely to occur in connection with nonperforming or troubled JPM Mortgage
Loans, and accordingly, a higher rate of prepayments is not likely to result
in a proportionate reduction of defaults. As a result, the yield on JPM
Subordinated Interests may in fact not improve as significantly at higher
prepayment speeds as shown in the tables. High prepayment rates are more
likely to occur in an environment of improved property values and lower
interest rates, and to the extent defaults are less likely to occur in such an
environment, defaults could decline as a percentage of original principal
amounts while prepayment rates are high.
68
<PAGE>
JPM 1997-SPTL-C1 SUBORDINATED INTERESTS
(PURCHASE PRICE OF [ ]% OF PRINCIPAL AMOUNT)
<TABLE>
<CAPTION>
0.0%CDR 2.0% CDR 4.0% CDR 6.0% CDR
------------ ------------ ------------ ------------
CPR LS BEY WAL PRIN BEY WAL PRIN BEY WAL PRIN BEY WAL PRIN
- --- ---- --- --- ---- --- --- ---- --- --- ---- --- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0.0% 30.0% % % % % % % % %
40.0
50.0
--- --- --- --- --- --- --- --- --- --- --- ---
Deflts/$[ ] % % % % % % % %
--- --- --- --- --- --- --- --- --- --- --- ---
5.0% 30.0% % % % % % % % %
40.0
50.0
--- --- --- --- --- --- --- --- --- --- --- ---
Deflts/$[ ] % % % % % % % %
--- --- --- --- --- --- --- --- --- --- --- ---
10.0% 30.0% % % % % % % % %
40.0
50.0
--- --- --- --- --- --- --- --- --- --- --- ---
Deflts/$[ ] % % % % % % % %
--- --- --- --- --- --- --- --- --- --- --- ---
15.0% 30.0 % % % % % % % %
40.0
50.0
--- --- --- --- --- --- --- --- --- --- --- ---
Deflts/$[ ] % % % % % % % %
--- --- --- --- --- --- --- --- --- --- --- ---
20.0% 30.0% % % % % % % % %
40.0
50.0
--- --- --- --- --- --- --- --- --- --- --- ---
Deflts/$[ ] % % % % % % % %
--- --- --- --- --- --- --- --- --- --- --- ---
</TABLE>
- ----
CDR: Conditional Default Rate
CPR: Constant Prepayment Rate
LS: Loss Severity Percentage--Each liquidation results in a realized Loss
allocable to principal equal to the percentage indicated
BEY: Bond Equivalent Yield
WAL: Weighted Average Life (Years)
PRIN: Percentage of the original balance of the class ultimately received
pursuant to the assumed default scenario
Deflts: Percentage of aggregate Cut-off Date principal balance of the JPM
Mortgage Loans that has defaulted pursuant to the assumed default
scenario
69
<PAGE>
Yield Table for the SPTL Subordinated Interests
The following table, regarding the SPTL Subordinated Interests, indicates
the pre-tax yield to maturity and the weighted average lives that would be
produced by the specified percentages of CPR, Mortgage Loan Conditional
Default Rates and loss severities, assuming the indicated purchase price and
the following additional assumptions. There can be no assurance that these
assumptions are reasonable or that additional or different assumptions should
not be made to determine potential yields on these investments.
(i) The SPTL Mortgage Loans prepay at the indicated percentage of CPR;
(ii) The maturity date of each of the Balloon Mortgage Loans is not
extended;
(iii) Distributions on the SPTL Subordinated Interests are received in
cash, on the 25th day of each month, commencing in [ ] 1997;
(iv) No defaults or delinquencies in, or modifications, waivers or
amendments respecting, the payment by the mortgagors of principal and
interest on the SPTL Mortgage Loans occur;
(v) Prepayments represent payment in full of individual SPTL Mortgage
Loans and are received on the respective due dates and include a
month's interest thereon;
(vi) There are no repurchases of SPTL Mortgage Loans due to breaches of any
representation and warranty or pursuant to an optional termination
otherwise;
(vii) The SPTL Subordinated Interests are purchased on [ ], 1997;
(viii) The purchase price is [ ]% for the Class E Certificates, [ ]% for
the Class F Certificates, and [ ]% for the Class NR Certificates,
plus in each case accrued interest from [ ], 1997 to but not
including an assumed date of purchase of [ ], 1997;
(ix) All required payments are made during the applicable collection
periods, except for balances which are assumed to be in default;
(x) All necessary principal and interest advances will be made;
(xi) Liquidation of a Default Balance occurs 6 months after assumed
default;
(xii) Upon liquidation, 70%, 60%, or 50% (the inverse of the indicated loss
severity) of the Default Balance, less any amount in respect of
principal previously received as a result of principal and interest
advances made following assumed default, is recovered;
(xiii) No amounts will be available on future distribution dates to cover
interest shortfalls in prior periods on the SPTL Subordinated
Interests;
(xiv) No mortgagor becomes the subject of a bankruptcy proceeding;
(xv) No special servicing fees are assumed to be incurred;
(xvi) Upon default, losses of 30%, 40% and 50% (each a "Loss Severity
Percentage"), as indicated, of the Default Balance will be realized
upon liquidation;
(xvii) One-month LIBOR is equal to [ ]% per annum and remains constant
while the SPTL Subordinated Interests remain outstanding; and
(xviii) The indices applicable to the SPTL Mortgage Loan notes are equal to
the following per annum rates and remain constant while the SPTL
Subordinated Interests remain outstanding:
<TABLE>
<S> <C>
Six-Month LIBOR................................................... [ ]%
Prime............................................................. [ ]%
One-Year U.S. Treasury............................................ [ ]%
COFI.............................................................. [ ]%
</TABLE>
"Six-Month LIBOR" means the average of the interbank offered rates for six-
month U.S. dollar denominated deposits in the London market based on quotation
of major banks. "Prime" means the daily prime loan rate as reported by Bank of
America N.T. & S.A. "One-Year U.S. Treasury" means the weekly average yield on
U.S.
70
<PAGE>
Treasury securities adjusted to a constant maturity of one year as published
by the Federal Reserve Board in Statistical Release H.15(519). "COFI" means
the cost of funds for savings institutions in Arizona, California and Nevada
that are member institutions of the Eleventh Federal Home Loan Bank District.
The assumed percentages of liquidations and loss severities on the SPTL
Mortgage Loans shown in the tables below are for illustrative purposes only
and the Company makes no representation with respect to the reasonableness of
the assumptions or that the actual liquidation and loss severity experience of
the SPTL Mortgage Loans will in any way correspond to any of the assumptions.
In addition, it was assumed in preparing the tables that no special servicing
fees or other expenses of the SPTL 1996-C1 trust fund will be paid, but in
fact defaults and liquidations would result in the payment to the special
servicer of special servicing fees and other expenses of such trust fund,
which payments would reduce the amount available for distribution to one or
more classes of SPTL Subordinated Interests. Consequently, there can be no
assurance that the pre-tax yield to an investor in any class of SPTL
Subordinated Interests will correspond to any of the pre-tax yields shown
below.
The following table generally shows higher yields for the SPTL Subordinated
Interests in scenarios involving higher rates of prepayments, primarily
because loss percentages are applied to remaining SPTL Mortgage Loan balances
rather than original SPTL Mortgage Loan balances. Accordingly, in scenarios
with high prepayments, losses are lower. Contrary to the assumptions above,
prepayments are less likely to occur in connection with nonperforming or
troubled SPTL Mortgage Loans, and accordingly, a higher rate of prepayments is
not likely to result in a proportionate reduction of defaults. As a result,
the yield on SPTL Subordinated Interests may in fact not improve as
significantly at higher prepayment speeds as shown in the tables. High
prepayment rates are more likely to occur in an environment of improved
property values and lower interest rates, and to the extent defaults are less
likely to occur in such an environment, defaults could decline as a percentage
of original principal amounts while prepayment rates are high.
71
<PAGE>
SPTL 1996-C1 SUBORDINATED INTERESTS
(PURCHASE PRICE OF [ ]% OF PRINCIPAL AMOUNT)
<TABLE>
<CAPTION>
0.0%CDR 2.0% CDR 4.0% CDR 6.0% CDR
------------ ------------ ------------ ------------
CPR LS BEY WAL PRIN BEY WAL PRIN BEY WAL PRIN BEY WAL PRIN
- --- ---- --- --- ---- --- --- ---- --- --- ---- --- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0.0% 30.0% % % % % % % % %
40.0
50.0
--- --- --- --- --- --- --- --- --- --- --- ---
Deflts/$[ ] % % % %
--- --- --- --- --- --- --- --- --- --- --- ---
5.0% 30.0% % % % %
40.0
50.0
--- --- --- --- --- --- --- --- --- --- --- ---
Deflts/$[ ] % % % %
--- --- --- --- --- --- --- --- --- --- --- ---
10.0% 30.0% % % % %
40.0
50.0
--- --- --- --- --- --- --- --- --- --- --- ---
Deflts/$[ ] % % % %
--- --- --- --- --- --- --- --- --- --- --- ---
15.0% 30.0 % % % %
40.0
50.0
--- --- --- --- --- --- --- --- --- --- --- ---
Deflts/$[ ] % % % %
--- --- --- --- --- --- --- --- --- --- --- ---
20.0% 30.0% % % % %
40.0
50.0
--- --- --- --- --- --- --- --- --- --- --- ---
Deflts/$[ ] % % % %
--- --- --- --- --- --- --- --- --- --- --- ---
</TABLE>
- ----
CDR: Conditional Default Rate
CPR: Constant Prepayment Rate
LS: Loss Severity Percentage--Each liquidation results in a realized Loss
allocable to principal equal to the percentage indicated
BEY: Bond Equivalent Yield
WAL: Weighted Average Life (Years)
PRIN: Percentage of the original balance of the class ultimately received
pursuant to the assumed default scenario
Deflts: Percentage of aggregate Cut-off Date principal balance of the SPTL
Mortgage Loans that has defaulted pursuant to the assumed default
scenario
72
<PAGE>
YIELD ON THE INTEREST ONLY CERTIFICATES
The yield to investors on the JPM IO, the SPTL Senior IO and the SPTL
Subordinate IOs (collectively, the "Initial IO Investments") will be highly
sensitive to the rate and timing of principal payments (including prepayments
and liquidations) on the Mortgage loans. Investors should fully consider the
associated risks to the Company, including the risk that a rapid rate of
principal prepayments of the Mortgage Loans could result in the failure of the
Company to recoup fully its investment in the Initial IO Investments.
The Pass-Through Rate on the JPM IO will equal the excess of the weighted
average Remittance Rate on the JPM Mortgage Loans over the Pass-Through Rates
on all the other JPM 1997-SPTL-C1 Certificates. The Pass-Through Rate on the
SPTL 1996-C1, Class A1X Certificates and the Class A2X, Class BX, Class CX and
Class DX Components (which components comprise the Class DX Certificates) will
equal the excess of the weighted average Remittance Rate on the SPTL Mortgage
Loans over the Pass-Through Rates on the Class A1, Class A2, Class B, Class C
and Class D Certificates (collectively, the "SPTL Senior Certificates"),
respectively. The Pass-Through Rates on the SPTL Senior Certificates will be
based on LIBOR subject to a maximum rate equal to the weighted average of the
Remittance Rates on the SPTL Mortgage Loans. Therefore, the Pass-Through Rates
on the JPM IO and the SPTL 1996-C1, Class A1X and Class DX Certificates (the
"SPTL LIBOR IOs") will be adversely affected by increases in the value of
LIBOR in excess of increases in the value of the Indices or decreases in the
value of the Indices in excess of decreases in the value of LIBOR.
In general, the yield to maturity on the JPM IO and the SPTL LIBOR IOs will
be lower if the Pass-Through Rate on the other JPM Certificates and the SPTL
Senior Certificates rises more than the weighted average Remittance Rate on
the JPM Mortgage Loans and the SPTL Mortgage Loans, respectively. The Pass-
Through Rate on such other JPM Certificates and SPTL Senior Certificates is
based upon the value of an index (LIBOR) which is difference from the value of
the indices applicable to the Mortgage Loans. Each Mortgage Loan adjusts
monthly, quarterly, semi-annually or annually based upon the related Index
whereas the Pass-Through Rates on such other JPM Certificates and SPTL Senior
Certificates adjust monthly based upon LIBOR. LIBOR and the indices applicable
to the Mortgage Loans may respond differently to economic and market factors,
and there is not necessarily any correlation between them. In addition, all of
the Mortgage Loans are subject to periodic rate caps, maximum mortgage
interest rates and minimum mortgage interest rates. Thus, it is possible, for
example, that LIBOR may rise during period in which the indices on the
Mortgage Loans are stable or are falling or that, even if both LIBOR and such
indices rise during the same period, LIBOR may rise more rapidly than such
indices and therefore the amount of interest collected on all Mortgage Loans
(adjusted to the Remittance Rate) may be insufficient to pay interest on a
class of Initial IO Investments.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the JPM IO to various rates of prepayment on the JPM Mortgage
Loans by projecting the monthly aggregate payments on the JPM IO and computing
the corresponding pre-tax yields to maturity on a corporate bond equivalent
basis, based on the assumptions described in clauses (i) through (vii) in the
second paragraph under "--Modeling Assumptions--Yield Table for the JPM
Subordinated Interests" herein. The table is also based on the following
assumptions: (i) one-month LIBOR is equal to [ ]% per annum and remains
constant while the JPM Subordinated Interests remain outstanding and (ii) the
indices applicable to the JPM Mortgage Loan notes are equal to the following
per annum rates and remain constant while the JPM Subordinated Interests
remain outstanding:
<TABLE>
<S> <C>
Six-Month LIBOR................................................... [ ]%
Prime............................................................. [ ]%
One-Year U.S. Treasury............................................ [ ]%
</TABLE>
73
<PAGE>
Any differences between such assumptions and the actual characteristics and
performance underscore the hypothetical nature of the table, which is provided
only to give a general sense of the sensitivity of yields in varying
prepayment scenarios.
PRE-TAX YIELD TO MATURITY OF THE JPM IO
<TABLE>
<CAPTION>
ASSUMED PURCHASE PRICE PREPAYMENT ASSUMPTION
AS A PERCENTAGE OF THE ---------------------------------------------------------------------
NOTIONAL AMOUNT 0% V1 V2 V3 V4
- ---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
</TABLE>
- --------
(1) V1 assumes the JPM Mortgage Loans prepay at 2% CPR the first year, 6% CPR
the second year and 9% CPR each year thereafter, V2 assumes the JPM
Mortgage Loans prepay at 5% CPR the first year, 10% CPR the second year
and 15% CPR each year thereafter, V3 assumes the JPM Mortgage Loans prepay
at 6% CPR the first year, 12% CPR the second year and 16% CPR each year
thereafter, and V4 assumes the JPM Mortgage Loans prepay at 7% CPR the
first year, 14% CPR the second year and 20% CPR each year thereafter.
Assumes early termination is exercised.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the SPTL Senior IO and the SPTL Subordinate IOs (the "SPTL IOs")
to various rates of prepayment on the SPTL Mortgage Loans by projecting the
monthly aggregate payments on the SPTL IOs and computing the corresponding
pre-tax yields to maturity on a corporate bond equivalent basis, based on the
assumptions described in clauses (i) through (vii), (xvii) and (xviii) in the
second paragraph under "--Modeling Assumptions--Yield Table for the SPTL
Subordinated Interests" herein.
Any differences between such assumptions and the actual characteristics and
performance underscore the hypothetical nature of the table, which are
provided only to give a general sense of the sensitivity of yields in varying
prepayment scenarios.
PRE-TAX YIELD TO MATURITY OF THE SPTL 1996-C1, CLASS A1X CERTIFICATES
<TABLE>
<CAPTION>
ASSUMED PURCHASE PRICE PREPAYMENT ASSUMPTION
AS A PERCENTAGE OF THE ---------------------------------------------------------------------
NOTIONAL AMOUNT 0% V1 V2 V3 V4
- ---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
</TABLE>
PRE-TAX YIELD TO MATURITY OF THE SPTL 1996-C1, CLASS DX CERTIFICATES
<TABLE>
<CAPTION>
ASSUMED PURCHASE PRICE PREPAYMENT ASSUMPTION
AS A PERCENTAGE OF THE ---------------------------------------------------------------------
NOTIONAL AMOUNT 0% V1 V2 V3 V4
- ---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
</TABLE>
PRE-TAX YIELD TO MATURITY OF THE SPTL 1996-C1, CLASS NRX CERTIFICATES
<TABLE>
<CAPTION>
ASSUMED PURCHASE PRICE PREPAYMENT ASSUMPTION
AS A PERCENTAGE OF THE ---------------------------------------------------------------------
NOTIONAL AMOUNT 0% V1 V2 V3 V4
- ---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
</TABLE>
74
<PAGE>
- --------
(1) V1 assumes the SPTL Mortgage Loans prepay at 2% CPR the first year, 6% CPR
the second year and 9% CPR each year thereafter, V2 assumes the Mortgage
Loans prepay at 5% CPR the first year, 10% CPR the second year and 15% CPR
each year thereafter, V3 assumes the SPTL Mortgage Loans prepay at 6% CPR
the first year, 12% CPR the second year and 16% CPR each year thereafter,
and V4 assumes the SPTL Mortgage Loans prepay at 7% CPR the first year,
14% CPR the second year and 20% CPR each year thereafter. Assumes early
termination is exercised.
Each pre-tax yield to maturity set forth in the preceding tables was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Initial IO Investments would
cause the discounted present value of such assumed stream cash flows to equal
the assumed purchase price listed in the corresponding table. Accrued interest
is included in the assumed purchase price of the Initial IO Investments and is
used in computing the corporate bond equivalent yield shown. These yields do
not take into account the different interest rates at which investors may be
able to reinvest funds received by them as distributions on the Initial IO
Investments, and thus do not reflect the return on any investment in the
Initial IO Investments when, as applicable, any reinvestment rates other than
the discount rates set forth in the preceding table are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the JPM Mortgage Loans and the SPTL
Mortgage Loans will be prepaid according to one particular pattern. For this
reason and because the timing of cash flows is critical to determining yields,
the pre-tax yield to maturity on the Initial IO Investments is likely to
differ from those shown in the tables, even if all of the JPM Mortgage Loans
and SPTL Mortgage Loans prepay at the indicated constant percentages of CPR
over any given time period or over the entire life of the Initial Subordinated
Investments.
SERVICING OF MORTGAGE LOANS
Although the Company may acquire the rights to service Mortgage Loans it
purchases, it does not intend to perform the actual servicing. Instead, a
third-party servicer will be selected to service the Mortgage Loans. In
addition, the Company may enter into Special Servicing agreements with third-
party special servicers.
With respect to the Initial Mortgage Loans and the Mortgage Collateral
underlying the Initial MBS Investments, SPTL will service the Mortgage Loans.
With respect to the Mortgage Collateral underlying the Initial MBS Interests,
Midland Loan Services, L.P. ("Midland") will act as special servicer and
master servicer, which means that Midland is liable for servicing the loans,
but has subcontracted with SPTL to perform the day to day servicing. In
connection with a prior CMBS transaction in which SPTL acts as subservicer for
Midland with respect to commercial mortgage loans originated or acquired by
SPTL, Midland has notified SPTL that SPTL was not in compliance in certain
respects with the subservicing agreement between SPTL and Midland. SPTL has
advised the Company of its belief that SPTL has a plan in place that, when
fully implemented, will rectify the issues raised by Midland in all material
respects. The master servicer may remove SPTL as sub-servicer at any time with
or without cause. See "Operating Policies and Objectives--The Company's
Assets--MBS Interests."
With respect to Mortgage Loans acquired from third parties unaffiliated with
Imperial Credit, the Company expects generally to contract with the current
servicer to continue to service the Mortgage Loans. The Company will attempt
to acquire the Special Servicing rights with respect to MBS Interests that it
purchases in the future, in which case it will contract with Midland or
another special servicer to perform the Special Servicing functions. No
assurances can be made, however, that the Company will be able to acquire
Special Servicing rights with respect to MBS Interests.
The Management Agreement will provide that the Manager will monitor and
administer the loan servicing activities provided by the servicers of the
Company's Mortgage Loans.
75
<PAGE>
SPTL'S SERVICING EXPERIENCE
SPTL is a California licensed industrial loan company supervised and
examined by the DOC, and the Seller's deposits are insured by the FDIC. SPTL
originates mortgage loans secured by multifamily residences and commercial
properties located primarily in California, Colorado, Oregon and Washington
through its two branches in California and several loan origination offices
located in various states.
The table below sets forth, for the periods indicated, the prepayment
experience with respect to all commercial and multifamily mortgage loans
underwritten or purchased by the Seller. The table below only includes
information with respect to prepayments for loans that existed in the Seller's
portfolio on or after June 30, 1995. The prepayment experience with respect to
the Mortgage Loans may be substantially different from that indicated below.
(The sum of the amounts and the percentages in the table below may not equal
the totals due to rounding.)
SOUTHERN PACIFIC THRIFT AND LOAN ASSOCIATION
HISTORICAL PREPAYMENTS
MULTIFAMILY AND COMMERCIAL PROPERTY PORTFOLIOS
(INCLUDING SECURITIZED LOANS)
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1996 1996 1996 1997 1997
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Quarter to Date
Prepayments............ $6,365,266 $3,745,067 $8,576,474 $5,338,097 $8,259,567 $
Quarter to Date
Annualized
Prepayment(1).......... 6.34% 3.26% 6.73% 3.67% 4.99% %
</TABLE>
- --------
(1) Annualized amount of prepayment in each quarter divided by the simple
average of beginning and ending principal balance.
The tables below summarize, at the respective dates indicated, the
delinquency and charge-off experience with respect to all first lien
commercial and multifamily Mortgage Loans underwritten by SPTL. The indicated
periods of delinquency are based on the number of days past due on a
contractual basis. The monthly payments under all of such Mortgage Loans are
due on the first day of each calendar month. Charge-offs generally are
established based upon an appraisal undertaken in connection with the
foreclosure or other conversion of a mortgage loan to real property.
The total amount of Mortgage Loans on which the data below is based includes
many Mortgage Loans which were not, as of March 31, 1997, outstanding long
enough to give rise to the possibility of default and charge-off. The
delinquency and charge-off experience with respect to the Initial Mortgage
Loans and the Mortgage Collateral underlying the Initial MBS Investments may
be expected to be higher, and may be substantially higher, than indicated
below. (The sum of the amounts and the percentages in the table below may not
equal the totals due to rounding.)
76
<PAGE>
SOUTHERN PACIFIC THRIFT AND LOAN ASSOCIATION
HISTORICAL DELINQUENCY AND CHARGE-OFFS
MULTIFAMILY AND COMMERCIAL INCOME PROPERTY PORTFOLIOS
(INCLUDING SECURITIZED LOANS)
<TABLE>
<CAPTION>
AT MARCH 31, 1996 AT JUNE 30, 1996 AT SEPTEMBER 30, 1996
---------------------------- ------------------------------ ------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF
OUTSTANDING OUTSTANDING OUTSTANDING
OUTSTANDING BALANCE OF OUTSTANDING BALANCE OF OUTSTANDING BALANCE OF
NO. BALANCE TOTAL LOANS NO. BALANCE TOTAL LOANS NO. BALANCE TOTAL LOANS
--- ------------ ----------- ----- ------------ ----------- ----- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Multifamily
Total Loans Out-
standing........ 934 $291,164,580 1,029 $325,312,554 1,114 $350,856,695
30-59 Days Past
Due............. 1 173,115 0.06% 1 89,763 0.03% 0 -- 0.00%
60-89 Days Past
Due............. 0 -- 0.00% 2 596,767 0.18% 2 1,334,734 0.38%
90-119 Days Past
Due............. 1 369,226 0.13% 0 -- 0.00% 4 618,529 0.18%
120 or More Days
Past Due........ 17 4,193,955 1.44% 12 2,104,781 0.65% 11 2,065,486 0.59%
--- ------------ ---- ----- ------------ ---- ----- ------------ ----
Total Delinquen-
cies............ 19 $ 4,736,296 1.63% 15 2,791,311 0.86% 17 $ 4,018,749 1.15%
Quarter to Date
Charge-Offs(1).. 836,000 0.32% 137,000 0.04% 4 49,563 0.01%
Commercial
Total Loans Out-
standing........ 448 $142,993,827 477 $159,437,786 506 $184,527,041
30-59 Days Past
Due............. 3 224,504 0.16% 0 -- 0.00% 0 -- 0.00%
60-89 Days Past
Due............. 0 -- 0.00% 3 573,339 0.36% 0 -- 0.00%
90-119 Days Past
Due............. 1 276,572 0.19% 0 -- 0.00% 2 404,098 0.22%
120 or More Days
Past Due........ 18 3,454,488 2.42% 15 2,738,685 1.72% 15 3,404,491 1.84%
--- ------------ ---- ----- ------------ ---- ----- ------------ ----
22 $ 3,955,564 2.77% 18 $ 3,312,024 2.08% 17 $ 3,808,589 2.06%
Quarter to Date
Charge-Offs(2).. -- 0.00% $ 249,000 0.16% 6 $ 182,873 0.11%
<CAPTION>
AT DECEMBER 31, 1996 AT MARCH 31, 1997 AT JUNE 30, 1997
------------------------------ ------------------------------ ---------------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF OF OF
OUTSTANDING OUTSTANDING OUTSTANDING
OUTSTANDING BALANCE OF OUTSTANDING BALANCE OF OUTSTANDING BALANCE OF
NO. BALANCE TOTAL LOANS NO. BALANCE TOTAL LOANS NO. BALANCE TOTAL LOANS
----- ------------ ----------- ----- ------------ ----------- --- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Multifamily
Total Loans Out-
standing........ 1,323 $421,518,257 1,471 $477,553,328
30-59 Days Past
Due............. 0 -- 0.00% 7 1,097,520 0.23%
60-89 Days Past
Due............. 11 3,306,353 0.78% 10 4,470,127 0.94%
90-119 Days Past
Due............. 3 550,490 0.13% 3 644,459 0.13%
120 or More Days
Past Due........ 10 2,125,166 0.50% 9 2,112,791 0.44%
----- ------------ ----------- ----- ------------ ----------- --- ----------- -----------
Total Delinquen-
cies............ 24 $ 5,982,009 1.42% 29 $ 8,324,897 1.74%
Quarter to Date
Charge-Offs(1).. 1 72,584 0.02% 1 160,537 0.03%
Commercial
Total Loans Out-
standing........ 541 $206,205,436 565 $218,507,776
30-59 Days Past
Due............. 0 -- 0.00% 3 1,421,040 0.65%
60-89 Days Past
Due............. 3 1,025,716 0.50% 4 1,117,420 0.51%
90-119 Days Past
Due............. 0 -- 0.00% 2 276,437 0.13%
120 or More Days
Past Due........ 13 3,052,814 1.48% 14 3,162,865 1.45%
----- ------------ ----------- ----- ------------ ----------- --- ----------- -----------
16 $ 4,078,530 1.98% 23 $ 5,977,762 2.74%
Quarter to Date
Charge-Offs(2).. 2 $ 32,548 0.02% 1 $ 35,906 0.02%
</TABLE>
- -----
(1) The percentages for "Quarter To Date Charge-Offs" are calculated based
upon the average outstanding balance of all multifamily loans for the
quarter.
(2) The percentages for "Quarter To Date Charge-Offs" are calculated based
upon the average outstanding balance of all commercial loans for the
quarter.
77
<PAGE>
SPECIAL SERVICING
The special servicer and master servicer of the Mortgage Collateral
underlying the Initial MBS Interests is Midland. Midland was organized under
the laws of the state of Missouri in 1992 as a limited partnership. Midland is
a real estate financial services company which provides loan servicing and
asset management for large pools of commercial and multifamily real estate
assets and which originates commercial real estate loans. Midland's address is
210 West 10th Street, 6th Floor, Kansas City, Missouri 64105.
As of May 31, 1997, Midland and its affiliates were responsible for the
servicing of approximately 11,994 commercial and multifamily loans with an
aggregate principal balance of approximately $16.4 billion, the collateral for
which is located in 50 states, Puerto Rico and the District of Columbia. With
respect to such loans, approximately 10,394 loans with an aggregate principal
balance of approximately $11.7 billion pertain to commercial and multifamily
mortgage-backed securities. Property type concentrations within the portfolio
include multifamily, office, retail, hotel/motel and other types of income
producing properties. Midland and its affiliates also provide commercial loan
servicing for newly-originated loans and loans acquired in the secondary
market on behalf of issuers of commercial and multifamily mortgage-backed
securities, financial institutions and private investors.
RESPONSIBILITIES OF MASTER SERVICER
Under the pooling and servicing agreements related to the Initial MBS
Interests, Midland, as master servicer, is required to service and administer
the related Mortgage Collateral solely on behalf of and in the best interests
of and for the benefit of the holders of the related MBS Interests including
the classes of MBS that will not be acquired by the Company, (collectively,
the "Certificateholders"), in accordance with the terms of the pooling and
servicing agreements.
RESPONSIBILITIES OF SPECIAL SERVICER
The servicing responsibility on a particular Mortgage Loan underlying the
Initial MBS Interests will be transferred to the special servicer upon the
occurrence of certain servicing transfer events (each, a "Servicing Transfer
Event"), including the following: (i) the Mortgage Loan is more than 60 days
delinquent in whole or in part in respect of any monthly payment or is
delinquent in whole or in part in respect of the related balloon payment
(except to the extent that with respect to any delinquency in the Balloon
Payment, the master servicer and the special servicer agree that such Mortgage
Loan is likely to be paid in full within 30 days after such default); (ii) the
related mortgagor has entered into or consented to bankruptcy, appointment of
a receiver or conservator or a similar insolvency or similar proceeding, or
the mortgagor has become the subject of a decree or order for such a
proceeding which shall have remained in force undischarged or unstayed for a
period of 60 days; (iii) the master servicer shall have received notice of the
foreclosure or proposed foreclosure of any other lien on the Mortgaged
Property; (iv) in the judgment of the master servicer, a payment default has
occurred and is not likely to be cured by the related mortgagor within
60 days; (v) the related mortgagor admits in writing its inability to pay its
debts generally as they become due, files a petition to take advantage of any
applicable insolvency or reorganization statute, makes an assignment for the
benefit of its creditors, or voluntarily suspends payment of its obligations;
(vi) any other material default has in the master servicer's judgment occurred
which is not reasonably susceptible to cure within the time periods and on the
conditions specified in the related mortgage; (vii) the related Mortgaged
Property becomes an REO Property; (viii) if for any reason, the master
servicer cannot enter into an assumption agreement upon the transfer by the
related mortgagor of the mortgage or (ix) an event has occurred which has
materially and adversely affected the value of the related Mortgaged Property
in the reasonable judgment of the master servicer. The Company intends to
negotiate similar terms for the Initial Mortgage Loans. A Mortgage Loan
serviced by a special servicer is referred to herein as a "Specially Serviced
Mortgage Loan". The special servicer will collect certain payments on such
Specially Serviced Mortgage Loans and make certain remittances to, and prepare
certain reports for the master servicer with respect to such Mortgage Loans.
To the extent that any Specially Serviced Mortgage Loan, in accordance with
its original terms or as modified in accordance with the pooling and servicing
agreement, becomes a performing
78
<PAGE>
Mortgage Loan for at least three consecutive months, the special servicer will
return servicing of such Mortgage Loan to the master servicer.
Midland will act as a special servicer with respect to the Mortgage
Collateral underlying the Initial MBS Interests. Under the Pooling and
Servicing Agreement the special servicer is required to service, administer
and dispose of Specially Serviced Mortgage Loans solely in the best interests
of and for the benefit of the Certificateholders, in accordance with the
pooling and servicing agreement.
The special servicer 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
Specially Serviced Mortgage Loan by operation of law or otherwise, if such
action is consistent with the servicing standard. There are limitations on the
special servicer's ability to acquire title to Mortgaged Property or to take
any other action that would cause the Certificateholders or related trustee to
be considered to hold title to, to be a "mortgagee-in-possession" of, or to be
an "owner" or an "operator" of such Mortgaged Property within the meaning of
certain federal environmental laws.
The special servicer generally is required to use its best efforts to sell
the Mortgaged Property within two years of acquisition, with certain
exceptions. In general, the special servicer will be required to (i) solicit
offers for any Mortgaged Property so acquired in such a manner as will be
reasonably likely to realize a fair price for such property and (ii) accept an
offer received from any person that constitutes a fair price and which is in
the best interest of the Certificateholders as determined by the special
servicer in accordance with the servicing standard.
The special servicer, may retain an independent contractor to manage and
operate Mortgaged Properties acquired in foreclosure. The retention of an
independent contractor, however, will not relieve the special servicer of any
of its obligations with respect to the management and operation of such
Mortgaged Property. Any such property will be managed in a manner consistent
with the servicing standard.
The special servicer will be obligated to follow or cause to be followed
such normal practices and procedures as it deems necessary or advisable to
realize upon Specially Serviced Mortgage Loan. If the proceeds of any
liquidation of the property securing the Specially Serviced Mortgage Loan are
less than the outstanding principal balance of the Specially Serviced Mortgage
Loan plus interest accrued thereon at the mortgage interest rate plus the
aggregate amount of expenses incurred by the special servicer in connection
with such proceedings and which are reimbursable under the agreement, the
Certificateholders will realize a loss in the amount of such difference.
79
<PAGE>
CAPITALIZATION
The capitalization of the Company, as of July 31, 1997, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, is as follows:
<TABLE>
<CAPTION>
AS
ACTUAL ADJUSTED(1)
--------- -----------
<S> <C> <C>
Common Stock, par value $.0001............................ $ 0.01 $
Authorized--500,000,000 shares
Outstanding--100 shares, 20,000,000 shares, as adjusted
Additional Paid-in Capital................................ 1,499.99
--------- --------
Total................................................... $1,500.00 $
========= ========
</TABLE>
- --------
(1) Includes 1,980,000 shares of Common Stock to be purchased by Imperial
Credit, after deducting offering and organizational expenses estimated to
be $ payable by the Company, and assuming no exercise of the
Underwriters' over-allotment option to purchase up to an additional
3,000,000 shares of Common Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF LIQUIDITY AND CAPITAL RESOURCES
ICCMIC has no operating history. ICCMIC's opening audited balance sheet as
of July 31, 1997, and related footnotes are presented elsewhere herein. The
management's discussion and analysis of liquidity and capital resources should
be read in conjunction with such opening balance sheet and related notes.
ICCMIC has been organized and will elect to qualify as a REIT under the Code
and, as such, anticipates distributing annually at least 95% of its taxable
income, subject to certain adjustments. Cash for such distributions is
expected to be generated from the Company's investments, although the Company
also may borrow funds to make distributions. The Company's revenues will be
derived from (i) ownership of Mortgage Loans; (ii) ownership of MBS Interests;
(iii) ownership of Real Estate Related Assets; and (iv) under certain
circumstances, ownership of Non Real Estate Assets (including interest and
revenues from other generally short-term investments). See "Distribution
Policy" and "Federal Income Tax Considerations."
The principal sources of the Company's funds will be the proceeds of the
Offering made pursuant to this Prospectus, and leveraging its assets primarily
through the issuance of CMOs, reverse repurchase agreements, warehouse lines
of credit and other borrowing arrangements, which management believes will be
sufficient to enable the Company to meet its anticipated liquidity and capital
requirements. See "Operating Policies and Objectives" and "Use of Proceeds."
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Charter provides that ICCMIC may issue up to 500,000,000 shares of
capital stock, all of which shall initially be classifed as Common Stock
($0.0001 par value). The Board of Directors of ICCMIC may classify and
reclassify any unissued shares of capital stock by setting or changing in any
one or more respects the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of capital stock. Upon completion of
this offering, 20,000,000 shares of Common Stock will be issued and
outstanding, and 6,700,000 shares of Common Stock will be reserved for
issuance upon exercise of options, and no preferred stock will be issued and
outstanding.
COMMON STOCK
All outstanding shares of Common Stock will be duly authorized, fully paid
and nonassessable upon the Closing. Subject to the preferential rights of any
other shares or series of shares of capital stock, holders of Common Stock are
entitled to receive dividends if and when authorized and declared by the Board
of Directors of ICCMIC out of assets legally available therefor and to share
ratably in the assets of ICCMIC legally available for distribution to its
stockholders in the event of its liquidation, dissolution or winding-up after
payment of, or adequate provision for, all known debts and liabilities of
ICCMIC. ICCMIC intends to pay quarterly dividends.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of stockholders, including the election of
directors, and, except as otherwise required by law or except as provided with
respect to any other class or series of shares of capital stock, the holders
of Common Stock will possess the exclusive voting power. There is no
cumulative voting in the election of directors, which means in all elections
of directors, each holder of Common Stock has the right to cast one vote for
each share of stock for each candidate.
PREFERRED STOCK
The Charter authorizes the Board of Directors to classify and reclassify
unissued capital stock into shares of preferred stock ("Preferred Stock") of
one or more series. Because the Board of Directors has the power to establish
the preferences and rights of each class or series of Preferred Stock, the
Board of Directors may afford the holders of any series or class of Preferred
Stock preferences, powers and rights, voting or otherwise, senior to the
rights of the holders of Common Stock. The Board could authorize the issuance
of Preferred Stock with terms and conditions which could have the effect of
discouraging a takeover or other transaction which holders of some, or a
majority, of the shares of Common Stock might believe to be in their best
interests or in which holders of some, or a majority, of the shares of Common
Stock might receive a premium for their shares of Common Stock over the then
market price of such shares of Common Stock. As of the date hereof, no shares
of Preferred Stock are outstanding and the Company has no current plans to
issue Preferred Stock.
RESTRICTIONS ON TRANSFER
For ICCMIC to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of capital
stock. Specifically, not more than 50% in value of ICCMIC's outstanding
capital stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) during the
last half of a taxable year (other than its 1997 taxable year), and ICCMIC
must be beneficially owned by 100 or more persons during at least 335 days of
a taxable year of 12 months or during a proportionate part of a shorter
taxable year (other than its 1997 taxable year). See "Federal Income Tax
Considerations--Requirements for Qualification."
Because the Board of Directors believes it is essential for ICCMIC to
continue to qualify as a REIT, the Charter, subject to certain exceptions and
waivers described below, provides that no person may own, or be
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deemed to own by virtue of the attribution provisions of the Code, more than
9.9% of the number of outstanding shares of Common Stock or of any series of
Preferred Stock (the "Ownership Limitation").
Subject to certain exceptions described below, ICCMIC's Charter provides
that any purported transfer of shares of Common Stock or Preferred Stock (or
certain other events) that would (i) result in any person owning, directly or
indirectly, shares of Common Stock or Preferred Stock in excess of the
Ownership Limitation, (ii) result in the shares of Common Stock or Preferred
Stock, collectively, being owned by fewer than 100 persons (determined without
reference to any rules of attribution), (iii) result in ICCMIC being "closely
held" within the meaning of section 856(h) of the Code, (iv) cause ICCMIC to
own, actually or constructively, 10% or more of the ownership interests in a
tenant of the Company's real property, within the meaning of section
856(d)(2)(B) of the Code or (v) result in such shares being owned by a
disqualified organization, (each of the foregoing shall be referred to herein
as a "Prohibited Transfer Event"), shall be void ab initio as to the transfer
of that number of shares that would otherwise be beneficially owned
(determined without reference to any rules of attribution) by the transferee,
and the intended transferee shall acquire no rights in such shares of Common
Stock or Preferred Stock. For purposes of the foregoing, a "Disqualified
Organization" means (A) the United States, any State or political subdivision
thereof, any foreign government, any international organization, or any agency
or instrumentally of the foregoing, (B) any organization (other than a
cooperative described in section 521 of the Code) which is exempt from tax
unless such organization is subject to the tax imposed by section 511 of the
Code and (C) any organization described in section 1381 (a)(2)(C) of the Code.
If there is a Prohibited Transfer Event, except as described below, the
purported transferor shall cease to own any right or interest in the number of
shares that would otherwise be transferred and such shares will be designated
as "Shares-in-Trust" and transferred automatically to a trust (the "Trust")
effective on the day before the purported transfer of such shares of Common
Stock or Preferred Stock. The record holder of the shares of Common Stock or
Preferred Stock that are designated as Shares-in-Trust (the "Prohibited
Owner") will be required to submit such number of shares of Common Stock or
Preferred Stock to ICCMIC for registration in the name of the Trust. The
trustee of the Trust (the "Trustee") will be designated by ICCMIC, but will
not be affiliated with ICCMIC. The beneficiary of the Trust (the
"Beneficiary") will be one or more charitable organizations that are named by
ICCMIC.
Shares-in-Trust will remain issued and outstanding shares of Common Stock or
Preferred Stock and will be entitled to the same rights and privileges as all
other shares of the same class or series. The Trustee will receive all
dividends and distributions on the Shares-in-Trust and will hold such
dividends or distributions in trust for the benefit of the Beneficiary. The
Trustee will vote all Shares-in-Trust. The Trustee will designate a permitted
transferee of the Shares-in-Trust, provided that the permitted transferee (i)
purchases such Shares-in-Trust for valuable consideration and (ii) acquires
such Shares-in-Trust without such acquisition resulting in a transfer to
another Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Trustee the amount of any dividends or distributions received by
the Prohibited Owner (i) that are attributable to any Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares became
Shares-in-Trust. The Prohibited Owner generally will receive from the Trustee
the lesser of (i) the price per share such Prohibited Owner paid for the
shares of Common Stock or Preferred Stock that were designated as Shares-in-
Trust (or, in the case of a gift or devise, the Market Price (as defined
below) per share on the date of such transfer) or (ii) the price per share
received by the Trustee from the sale of such Shares-in-Trust. Any amounts
received by the Trustee in excess of the amounts to be paid to the Prohibited
Owner will be distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to ICCMIC,
or its designee, at a price per share equal to the lesser of (i) the price per
share in the transaction that created such Shares-in-Trust (or, in the case of
a gift or devise, the Market Price per share on the date of such transfer) or
(ii) the Market Price per share on the date that ICCMIC, or its designee,
accepts such offer. ICCMIC will have the right to accept such offer for a
period of ninety days after the later of (i) the date of the purported
transfer which resulted in such Shares-in-Trust or (ii) the date ICCMIC
determines in good faith that a transfer resulting in such Shares-in-Trust
occurred.
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"Market Price" on any date shall mean the average of the Closing Price (as
defined below) for the five consecutive Trading Days (as defined below) ending
on such date. The "Closing Price" on any date shall mean the average of the
high bid and low asked prices in the over-the-counter market, as reported by
The Nasdaq Stock Market. "Trading Day" shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in the State of New
York are authorized or obligated by law or executive order to close.
Any person who acquires or attempts to acquire shares of Common Stock or
Preferred Stock in violation of the foregoing restrictions, or any person who
owned shares of Common Stock or Preferred Stock that were transferred to a
Trust, will be required (i) to give immediately written notice to ICCMIC of
such event and (ii) to provide to ICCMIC such other information as it may
request in order to determine the effect, if any, of such transfer on ICCMIC's
status as a REIT.
All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding shares of Common Stock or Preferred Stock must, within 30 days
after January 1 of each year, provide to ICCMIC a written statement or
affidavit stating the name and address of such direct or indirect owner, the
number of shares of Common Stock or Preferred Stock owned directly or
indirectly, and a description of how such shares are held. In addition, each
direct or indirect stockholder shall provide to ICCMIC such additional
information as ICCMIC may request in order to determine the effect, if any, of
such ownership on ICCMIC's status as a REIT and to insure compliance with the
Ownership Limitation.
The Ownership Limitation generally will not apply to the acquisition of
shares of Common Stock or Preferred Stock by an underwriter that participates
in a public offering of such shares. In addition, the Board of Directors, upon
receipt of a ruling from the Service or an opinion of counsel and upon such
other conditions as the Board of Directors may direct, may exempt a person
from the Ownership Limitation under certain circumstances. The foregoing
restrictions will not be removed until the Board of Directors determines that
it is no longer in the best interests of ICCMIC to attempt to qualify, or to
continue to qualify, as a REIT and there is an affirmative vote of two-thirds
of all of the votes ordinarily entitled to be cast in the election of
directors, voting together as a single class at a regular or special meeting
of the stockholders of ICCMIC.
All certificates representing shares of Common Stock or Preferred Stock will
bear a legend referring to the restrictions described above.
The Ownership Limitation could have the effect of discouraging a takeover or
other transaction in which holders of some, or a majority, of shares of Common
Stock might receive a premium for their shares of Common Stock over the then
prevailing market price or which such holders might believe to be otherwise in
their best interest.
DIVIDEND REINVESTMENT PLAN
ICCMIC may implement a dividend reinvestment plan whereby stockholders may
automatically reinvest their dividends in ICCMIC's Common Stock. Details about
any such plan would be sent to ICCMIC's stockholders following adoption
thereof by the Board of Directors.
REPORTS TO STOCKHOLDERS
ICCMIC will furnish its stockholders with annual reports containing audited
financial statements certified by independent public accountants and
distribute quarterly reports containing unaudited financial information for
each of the first three quarters of the year.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is U.S. Stock Transfer
Corporation.
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CERTAIN PROVISIONS OF MARYLAND LAW AND
OF ICCMIC'S CHARTER AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Charter and Bylaws of ICCMIC does not purport to be complete and is subject to
and qualified in its entirety by reference to Maryland law and the Charter and
Bylaws of ICCMIC. Certain provisions of Maryland law and the Charter and
Bylaws are described elsewhere in this Prospectus.
BOARD OF DIRECTORS
The Bylaws provide that the number of Directors of ICCMIC may be increased
or decreased by the Board of Directors but may not be fewer than the minimum
number required by Maryland law nor more than nine. Any vacancy on the Board
of Directors may be filled, at any regular meeting or at any special meeting
called for that purpose, by a majority of the remaining Directors, except that
a vacancy resulting from an increase in the number of Directors may be filled
by a majority of the entire Board of Directors.
ICCMIC's Charter provides that a Director may be removed from office at any
time, but only for cause and then only by the affirmative vote of at least
two-thirds of all of the votes ordinarily entitled to be cast in the election
of Directors voting together as a single class.
AMENDMENT
ICCMIC reserves the right from time to time to make any amendment to its
Charter now or hereafter authorized by law, including any amendments which
alter the contract rights as expressly set forth in the Charter of any shares
of outstanding stock, provided that no such amendment which changes the terms
or contract rights of any of its outstanding stock shall be valid unless such
amendment shall have been authorized by not less than a majority of the
outstanding shares entitled to vote thereon. The Charter provides that
provisions relating to ICCMIC's election to be taxed as a REIT, approval of
certain matters by the Independent Directors, dissolution of the Corporation
and certain restrictions on the transferability of Common Stock or Preferred
Stock cannot be amended without the affirmative vote of at least two-thirds of
all of the votes ordinarily entitled to be cast in the election of Directors
voting together as a single class. ICCMIC's Bylaws may be amended by the Board
of Directors or by the affirmative vote of at least two-thirds of all of the
votes ordinarily entitled to be cast in the election of Directors voting
together as a single class. The Charter provides that any amendment of the
provisions of the Charter relating to indemnification of officers and
directors shall not retroactively affect any act or failure to act that
occurred prior to the amendment.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting
power of the corporation's shares or an affiliate of the corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then outstanding
voting stock of the corporation (an "Interested Stockholder") or an affiliate
of such an Interested Stockholder are prohibited for five years after the most
recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative
vote of at least (a) 80% of the votes entitled to be cast by holders of
outstanding shares of voting stock of the corporation and (b) two-thirds of
the votes entitled to be cast by holders of voting stock of the corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares. These provisions of Maryland law do not apply, however, to
business combinations that are approved or exempted by the board of directors
of the corporation prior to the time that the Interested Stockholder becomes
an Interested Stockholder.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to
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be cast on the matter, excluding shares of stock owned by the acquirer, by
officers or by directors who are employees of the corporation. "Control
shares" are voting shares of stock which, if aggregated with all other such
shares of stock previously acquired by the acquirer or in respect of which the
acquirer is able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the acquirer to exercise
voting power in electing directors within one of the following ranges of
voting power: (1) one-fifth or more but less than one-third, (2) one-third or
more but less than a majority, or (3) a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained stockholder approval. A
"control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquirer or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquirer becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquirer in the
control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation. ICCMIC's Bylaws currently contain a provision which
limits the applicability of this statute to ICCMIC and its stockholders, but
the provision may be amended or eliminated by the Board of Directors.
OPERATIONS
The Company is generally prohibited from engaging in certain activities and
acquiring or holding property or engaging in any activity that would cause the
Company to fail to qualify as a REIT.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of ICCMIC provide (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by such stockholders may be made
only (i) pursuant to ICCMIC's notice of the meeting, (ii) by the Board of
Directors or (iii) by a stockholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws and
(b) with respect to special meetings of stockholders, only the business
specified in ICCMIC's notice of meeting may be brought before the meeting of
stockholders, and nominations of persons for election to the Board of
Directors may be made only (i) pursuant to ICCMIC's notice of meeting, (ii) by
the Board of Directors or (iii) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by a stockholder
who is entitled to vote at the meeting and has complied with the advance
notice provisions set forth in the Bylaws.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
CHARTER AND BYLAWS
The business combination provisions and the control share acquisition
provisions of the MGCL, the provisions of the Charter on removal of directors
and the advance notice provisions of the Bylaws could delay, defer or prevent
a change in control of ICCMIC or other transaction that might involve a
premium price for holders of Common Stock or otherwise be in their best
interest.
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COMMON STOCK AVAILABLE FOR FUTURE SALE
Upon the closing of this Offering, the Company will have outstanding
20,000,000 shares of Common Stock. Of the outstanding shares, 18,020,000
shares of Common Stock to be sold in this Offering will be freely tradeable
without restriction or further registration under the Securities Act unless
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act. Of such shares, 1,980,000 shares will become
eligible for future sale commencing two years from the Closing Date (the date
of the expiration of the period such stockholder has agreed with the
Underwriters not to offer, sell or contact to sell or otherwise dispose of its
shares). As described below, Rule 144, permits resales of restricted
securities subject to certain restrictions. In general, under Rule 144 as
currently in effect, a person (or persons whose shares are aggregated) who
beneficially owned shares for at least one year, including any person who may
be deemed an "affiliate" of the Company, would be entitled to sell within any
three-month period a number of such shares that does not exceed the greater of
1% of the shares of the Company's Common Stock then outstanding shares upon
the closing of this Offering (2,000,000 shares) or the average weekly trading
volume in the Company's Common Stock during the four calendar weeks preceding
the date on which notice of the sale is filed with the Commission. A person
who is not deemed to have been an "affiliate" of the Company at any time
during the three months immediately preceding a sale and who has beneficially
owned shares for at least two years would be entitled to sell such shares
under Rule 144, without regard to the volume limitation described above.
The Company and its directors and executive officers have agreed with the
Underwriters that, for a period of 120 days following the commencement of this
Offering, they will not sell, contract to sell or otherwise dispose of any of
shares of Common Stock or rights to acquire such shares (other than pursuant
to employee plans) without the prior written consent of Friedman, Billings,
Ramsey & Co., Inc.
Additionally, upon the closing of this Offering, there will be outstanding
stock options for 2,000,000 shares of Common Stock which will be granted at
the initial public offering price, to executive officers, directors and
employees of the Company or of the Manager, none of which, except in the event
of a change of control of the Company, will be exercisable until one year from
the date of grant.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common
Stock, or the perception that such sales could occur, may affect adversely
prevailing market prices of the Common Stock.
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of Common Stock in ICCMIC.
Sonnenschein Nath & Rosenthal has acted as counsel to ICCMIC and has reviewed
this summary and has rendered an opinion that the descriptions of the law and
the legal conclusions contained herein are correct in all material respects,
and the discussions hereunder fairly summarize the federal income tax
considerations that are likely to be material to ICCMIC and a holder of the
Common Stock. The discussion contained herein does not address all aspects of
taxation that may be relevant to particular stockholders in light of their
personal investment or tax circumstances, or to certain types of stockholders
(including insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, foreign corporations, and persons who are not
citizens or residents of the United States) subject to special treatment under
the federal income tax laws.
The statements in this discussion and the opinion of Sonnenschein Nath &
Rosenthal are based on current provisions of the Code, existing, temporary,
and currently proposed Treasury Regulations promulgated under the Code, the
legislative history of the Code, existing administrative rulings and practices
of the Service, and judicial decisions. No assurance can be given that future
legislative, judicial, or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
COMMON STOCK AND OF ICCMIC'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX
LAWS.
TAXATION OF THE COMPANY
ICCMIC plans to make an election to be taxed as a REIT under sections 856
through 860 of the Code, commencing with its taxable year ending on December
31, 1997.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its stockholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
Sonnenschein Nath & Rosenthal has acted as counsel to ICCMIC in connection
with the Offering and ICCMIC's election to be taxed as a REIT. In the opinion
of Sonnenschein Nath & Rosenthal, assuming that the elections and other
procedural steps described in this discussion of "Federal Income Tax
Considerations" are completed by ICCMIC in a timely fashion, commencing with
ICCMIC's taxable year ending December 31, 1997, ICCMIC will qualify to be
taxed as a REIT pursuant to sections 856 through 860 of the Code, and ICCMIC's
organization and proposed method of operation will enable it to continue to
meet the requirements for qualification and taxation as a REIT under the Code.
Investors should be aware, however, that opinions of counsel are not binding
upon the Service or any court. It must be emphasized that Sonnenschein Nath &
Rosenthal's opinion is based on various assumptions and is conditioned upon
certain representations made by ICCMIC as to factual matters, including
representations regarding the nature of ICCMIC's properties and the future
conduct of its business. Such factual assumptions and representations are
described below in this discussion of "Federal Income Tax Considerations" and
are set out in the federal income tax opinion that will be delivered by
Sonnenschein Nath & Rosenthal at the closing of the Offering. Moreover, such
qualification and taxation as a REIT depends upon ICCMIC's ability to meet on
a continuing basis, through actual annual operating results, asset ownership,
distribution levels, and stock ownership, the various qualification tests
imposed under the Code discussed below. Sonnenschein Nath & Rosenthal will not
review ICCMIC's
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compliance with those tests on a continuing basis. Accordingly, no assurance
can be given that the actual results of ICCMIC's operations for any particular
taxable year will satisfy such requirements. For a discussion of the tax
consequences of failure to qualify as a REIT, see "--Failure to Qualify."
If ICCMIC qualifies for taxation as a REIT, it generally will not be subject
to federal corporate income tax on its net income that is distributed
currently to its stockholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and stockholder
levels) that generally results from an investment in a corporation. However,
ICCMIC will be subject to federal income tax in the following circumstances.
First, ICCMIC will be taxed at regular corporate rates on any undistributed
REIT taxable income, including undistributed net capital gains. Second, under
certain circumstances, ICCMIC may be subject to the "alternative minimum tax"
on its undistributed items of tax preference, if any. Third, if ICCMIC has (i)
net income from the sale or other disposition of "foreclosure property" that
is held primarily for sale to customers in the ordinary course of business or
(ii) other nonqualifying income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income. Fourth, if ICCMIC has net
income from prohibited transactions (which are, in general, certain sales or
other dispositions of property (other than foreclosure property) held
primarily for sale to customers in the ordinary course of business), such
income will be subject to a 100% tax. Fifth, if ICCMIC should fail to satisfy
the 75% gross income test or the 95% gross income test (as discussed below),
and nonetheless has maintained its qualification as a REIT because certain
other requirements have been met, it will be subject to a 100% tax on the net
income attributable to the greater of the amount by which ICCMIC fails the 75%
or 95% gross income test. Sixth, if ICCMIC should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year, and
(iii) any undistributed taxable income from prior periods, ICCMIC would be
subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed. Seventh, if ICCMIC acquires any asset from a
C corporation (i.e., a corporation generally subject to full corporate-level
tax) in a merger or other transaction in which the basis of the asset in
ICCMIC's hands is determined by reference to the basis of the asset (or any
other asset) in the hands of the C corporation and ICCMIC recognizes gain on
the disposition of such asset during the 10-year period beginning on the date
on which it acquired such asset, then to the extent of such asset's "built-in-
gain" (i.e., the excess of the fair market value of such asset at the time of
acquisition by ICCMIC over the adjusted basis in such asset at such time),
ICCMIC will be subject to tax at the highest regular corporate rate applicable
(as provided in Treasury Regulations that have not yet been promulgated). The
results described above with respect to the tax on "built-in-gain" assume that
ICCMIC will elect pursuant to IRS Notice 88-19 to be subject to the rules
described in the preceding sentence if it were to make any such acquisition.
See "Proposed Legislation." Finally, ICCMIC will be subject to tax at the
highest marginal corporate rate on the portion of any Excess Inclusion derived
by ICCMIC from REMIC Residual Interests equal to the percentage of the stock
of ICCMIC held by the United States, any state or political subdivision
thereof, any foreign government, any international organization, any agency or
instrumentality of any of the foregoing, any other tax-exempt organization
(other than a farmer's cooperative described in section 521 of the Code) that
is exempt from taxation under the unrelated business taxable income provisions
of the Code, or any rural electrical or telephone cooperative (each, a
"Disqualified Organization"). Any such tax on the portion of any Excess
Inclusion allocable to stock of ICCMIC held by a Disqualified Organization
will reduce the cash available for distribution from ICCMIC to all
stockholders.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust, or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation,
but for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the
Code; (v) the beneficial ownership of which is held by 100 or more persons;
(vi) not more than 50% in value of the outstanding shares of which is owned,
directly or indirectly, by five or fewer individuals (as defined in the Code
to include certain entities) during the last half of each taxable year (the
"5/50 Rule"); (vii) that makes an election to be a REIT (or has made such
election for a previous taxable year) and satisfies all
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relevant filing and other administrative requirements established by the
Service that must be met in order to elect and maintain REIT status; (viii)
that uses a calendar year for federal income tax purposes and complies with
the recordkeeping requirements of the Code and Treasury Regulations
promulgated thereunder; and (ix) that meets certain other tests, described
below, regarding the nature of its income and assets. Conditions (i) to (iv),
inclusive, must be met during the entire taxable year and condition (v) must
be met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months. Conditions (v)
and (vi) will not apply until after the first taxable year for which an
election is made by ICCMIC to be taxed as a REIT. For purposes of determining
stock ownership under the 5/50 Rule, a supplemental unemployment compensation
benefits plan, a private foundation, or a portion of a trust permanently set
aside or used exclusively for charitable purposes generally is considered an
individual. A trust that is a qualified trust under Code section 401(a),
however, generally is not considered an individual and beneficiaries of such
trust are treated as holding shares of a REIT in proportion to their actuarial
interests in such trust for purposes of the 5/50 Rule.
Prior to the consummation of the Offering, ICCMIC did not satisfy conditions
(v) and (vi) in the preceding paragraph. ICCMIC anticipates issuing sufficient
Common Stock with sufficient diversity of ownership pursuant to the Offering
to allow it to satisfy requirements (v) and (vi). In addition, ICCMIC's
Charter provides for restrictions regarding the transfer of the Common Stock
that are intended to assist ICCMIC in continuing to satisfy the share
ownership requirements described in clauses (v) and (vi) above. Such transfer
restrictions are described in "Description of Capital Stock--Restrictions on
Transfer."
ICCMIC currently has one corporate subsidiary, ICMSC, and may have
additional corporate subsidiaries in the future. Code section 856(i) provides
that a corporation that is a "qualified REIT subsidiary" shall not be treated
as a separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a "qualified REIT subsidiary" shall be treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
"qualified REIT subsidiary" is a corporation, all of the capital stock of
which has been held by the REIT at all times during the period such
corporation was in existence. Thus, in applying the requirements described
herein, any "qualified REIT subsidiaries" of ICCMIC will be ignored, and all
assets, liabilities, and items of income, deduction, and credit of such
subsidiaries will be treated as assets, liabilities, and items of income,
deduction, and credit of ICCMIC. ICMSC is a "qualified REIT subsidiary."
Accordingly, ICMSC will not be subject to federal corporate income taxation,
although it may be subject to state and local taxation.
ICCMIC may decide in the future to organize the Operating Partnership. If it
does so, initially it will own 100% of the partnership interests. Pursuant to
Treasury Regulations effective January 1, 1997 relating to entity
classification (the "Check-the-Box Regulations"), an unincorporated entity
that has a single owner and that does not elect to be classified as a
corporation is disregarded as an entity separate from its owner for federal
income tax purposes. Because ICCMIC will be deemed to own 100% of the
partnership interests in the Operating Partnership for federal income tax
purposes unless and until interests in the Operating Partnership are issued to
other persons, the Operating Partnership will be disregarded as an entity
separate from ICCMIC under the Check-the-Box Regulations.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate
share of the assets of the partnership and will be deemed to be entitled to
the gross income of the partnership attributable to such share. In addition,
the assets and gross income of the partnership will retain the same character
in the hands of the REIT for purposes of section 856 of the Code, including
satisfying the gross income and asset tests described below. If formed, when
the Operating Partnership admits a partner other than ICCMIC or a qualified
REIT subsidiary of ICCMIC, ICCMIC's proportionate share of the assets and
gross income of the Operating Partnership will be treated as assets and gross
income of ICCMIC for purposes of applying the requirements described herein.
INCOME TESTS. In order for ICCMIC to qualify and to maintain its
qualification as a REIT, three requirements relating to ICCMIC's gross income
must be satisfied annually. First, at least 75% of ICCMIC's gross income
(excluding gross income from prohibited transactions) for each taxable year
must consist of defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real
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property (including "rents from real property" and interest on obligations
secured by mortgages on real property or on interests in real property) or
temporary investment income. Second, at least 95% of ICCMIC's gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived from such real property, mortgages on real property, or
temporary investments, and from dividends, other types of interest, and gain
from the sale or disposition of stock or securities, or from any combination
of the foregoing. Third, not more than 30% of ICCMIC's gross income (including
gross income from prohibited transactions) for each taxable year may be gain
from the sale or other disposition of (i) stock or securities held for less
than one year, (ii) dealer property that is not foreclosure property, and
(iii) certain real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property). The specific
application of these tests to ICCMIC is discussed below.
The term "interest," as defined for purposes of the 75% and 95% gross income
tests, generally does not include any amount received or accrued (directly or
indirectly) if the determination of such amount depends in whole or in part on
the income or profits of any person. However, an amount received or accrued
generally will not be excluded from the term "interest" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. In
addition, an amount received or accrued generally will not be excluded from
the term "interest" solely by reason of being based on the income or profits
of a debtor if the debtor derives substantially all of its gross income from
the related property through the leasing of substantially all of its interests
in the property, to the extent the amounts received by the debtor would be
characterized as rents from real property if received by a REIT.
Interest on obligations secured by mortgages on real property or on
interests in real property is qualifying income for purposes of the 75% gross
income test. Any amount includible in gross income with respect to a regular
or residual interest in a REMIC generally is treated as interest on an
obligation secured by a mortgage on real property. If, however, less than 95%
of the assets of a REMIC consists of real estate assets (determined as if
ICCMIC held such assets), ICCMIC will be treated as receiving directly its
proportionate share of the income of the REMIC. In addition, if ICCMIC
receives interest income with respect to a mortgage loan that is secured by
both real property and other property and the highest principal amount of the
loan outstanding during a taxable year exceeds the fair market value of the
real property on the date ICCMIC purchased the mortgage loan, the interest
income will be apportioned between the real property and the other property,
which apportionment may cause ICCMIC to recognize income that is not
qualifying income for purposes of the 75% gross income test.
Sonnenschein Nath & Rosenthal is of the opinion that the interest, original
issue discount, and market discount income that ICCMIC derives from its
investments in MBS Interests, IOs, and Inverse IOs generally will be
qualifying interest income for purposes of both the 75% and the 95% gross
income tests, except to the extent that less than 95% of the assets of a REMIC
in which ICCMIC holds an interest consists of real estate assets (determined
as if ICCMIC held such assets), and ICCMIC's proportionate share of the income
of the REMIC includes income that is not qualifying income for purposes of the
75% and 95% gross income tests. Most of the income that ICCMIC recognizes with
respect to its investments in Mortgage Loans will be qualifying income for
purposes of both the 75% and 95% gross income tests. In some cases, however,
the loan amount of a Mortgage Loan may exceed the value of the real property
securing the loan, which will result in a portion of the income from the loan
being classified as qualifying income for purposes of the 95% gross income
test, but not for purposes of the 75% gross income test. It is also possible
that, in some instances, the interest income from a Distressed Mortgage Loan
may be based in part on the borrower's profits or net income, which generally
will disqualify the income from the loan for purposes of both the 75% and the
95% gross income tests. Finally, if ICCMIC forecloses on a loan that it has
held for less than four years, any gain that ICCMIC recognizes upon the act of
foreclosure as a result of the retirement of the loan will not be qualifying
income for purposes of the 30% gross income test.
ICCMIC may acquire Construction Loans or Mezzanine Loans that have shared
appreciation provisions. To the extent interest from a loan that is based on
the cash proceeds from the sale of property constitutes a "shared appreciation
provision" (as defined in the Code), income attributable to such participation
feature will be treated as gain from the sale of the secured property, which
generally is qualifying income for purposes of the 75% and
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95% gross income tests. However, if gain from any "shared appreciation
provision" is triggered within four years of the date the related loan is
made, such gain will be nonqualifying income for purposes of the 30% gross
income test. In addition, ICCMIC may be required to recognize income from a
shared appreciation provision over the term of the related loan using the
constant yield method pursuant to certain Treasury Regulations.
The Company may acquire and originate Mortgage Loans and securitize such
loans through the issuance of non-REMIC CMOs. As a result of such
transactions, the Company will retain an ownership interest in the Mortgage
Loans that has economic characteristics similar to those of a MBS Interest. In
addition, the Company may resecuritize MBS (or non-REMIC CMOs) through the
issuance of non-REMIC CMOs, retaining an interest in the MBS used as
collateral in the resecuritization transaction. Such transactions will not
cause ICCMIC to fail to satisfy the gross income tests or the asset tests
described below.
ICCMIC may receive income not described above that is not qualifying income
for purposes of the 75% and 95% gross income tests. ICCMIC will monitor the
amount of nonqualifying income produced by its assets and has represented that
it will manage its portfolio in order to comply at all times with the three
gross income tests.
The rent received by ICCMIC from the tenants of its Real Property ("Rent")
will qualify as "rents from real property" in satisfying the gross income
tests for a REIT described above only if several conditions are met. First,
the amount of Rent must not be based, in whole or in part, on the income or
profits of any person. However, an amount received or accrued generally will
not be excluded from the term "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. Second,
the Code provides that the Rent received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if ICCMIC, or
a direct or indirect owner of 10% or more of ICCMIC, owns 10% or more of the
ownership interests in such tenant, taking into account both direct and
constructive ownership (a "Related Party Tenant"). Third, if Rent attributable
to personal property, leased in connection with a lease of Real Property, is
greater than 15% of the total Rent received under the lease, then the portion
of Rent attributable to such personal property will not qualify as "rents from
real property." Finally, for the Rent to qualify as "rents from real
property," ICCMIC generally must not operate or manage the Real Property or
furnish or render services to the tenants of such Real Property, other than
through an "independent contractor" who is adequately compensated and from
whom ICCMIC derives no revenue. The "independent contractor" requirement,
however, does not apply to the extent the services provided by ICCMIC are
"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not otherwise considered "rendered to the occupant."
ICCMIC has represented that it will not charge Rent for any portion of any
Real Property that is based, in whole or in part, on the income or profits of
any person (except by reason of being based on a fixed percentage or
percentages of receipts of sales, as described above) to the extent that the
receipt of such Rent would jeopardize ICCMIC's status as a REIT. In addition,
ICCMIC has represented that, to the extent that it receives Rent from a
Related Party Tenant, such Rent will not cause ICCMIC to fail to satisfy
either the 75% or 95% gross income test. ICCMIC also has represented that it
will not allow the Rent attributable to personal property leased in connection
with any lease of Real Property to exceed 15% of the total Rent received under
the lease, if the receipt of such Rent would cause ICCMIC to fail to satisfy
either the 75% or 95% gross income test. Furthermore, as a result of
restrictions on the ownership of stock in ICCMIC, no person may own, directly
or indirectly, more than 9.9% of ICCMIC. ICCMIC has represented that neither
Imperial Credit nor any person constructively owned by Imperial Credit will
pay any rent to ICCMIC, so that ICCMIC will not receive any rent from a
Related Party Tenant. Finally, ICCMIC has represented that it will not operate
or manage its Real Property or furnish or render noncustomary services to the
tenants of its Real Property other than through an "independent contractor,"
to the extent that such operation or the provision of such services would
jeopardize ICCMIC's status as a REIT.
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses
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directly connected with the production of such income. "Foreclosure property"
is defined as any real property (including interests in real property) and any
personal property incident to such real property (i) that is acquired by a
REIT as the result of such REIT having bid in such property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement
or process of law, after there was a default (or default was imminent) on a
lease of such property or on an indebtedness owed to the REIT that such
property secured, (ii) for which the related loan was acquired by the REIT at
a time when default was not imminent or anticipated, and (iii) for which such
REIT makes a proper election to treat such property as foreclosure property.
ICCMIC does not anticipate that it will receive any income from foreclosure
property that is not qualifying income for purposes of the 75% gross income
test, but, if ICCMIC does receive any such income, ICCMIC will make an
election to treat the related property as foreclosure property. If property is
not eligible for the election to be treated as foreclosure property
("Ineligible Property") because the related loan was acquired by the REIT at a
time when default was imminent or anticipated, income received with respect to
such Ineligible Property may not be qualifying income for purposes of the 75%
or 95% gross income test. In addition, if a REIT disposes of Ineligible
Property at a gain within four years of acquiring such property, such gain
will be nonqualifying income for purposes of the 30% income test.
ICCMIC has represented that it will manage its assets so that it does not
violate the 30% income test in any taxable year. Any gross income derived from
a prohibited transaction is nonqualifying income for purposes of the 30%
income test and the net income from such a transaction is subject to a 100%
tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held
primarily for sale to customers in the ordinary course of a trade or business.
The Company believes that no asset owned by ICCMIC or, if it is formed, the
Operating Partnership will be held for sale to customers and that a sale of
any such asset will not be in the ordinary course of ICCMIC's or the Operating
Partnership's business. Whether property is held "primarily for sale to
customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those
related to a particular property. Nevertheless, ICCMIC will attempt to comply
with the terms of safe-harbor provisions in the Code prescribing when asset
sales will not be characterized as prohibited transactions. Complete assurance
cannot be given, however, that ICCMIC can comply with the safe-harbor
provisions of the Code or avoid owning property that may be characterized as
property held "primarily for sale to customers in the ordinary course of a
trade or business."
It is possible that, from time to time, ICCMIC will enter into hedging
transactions with respect to one or more of its assets or liabilities. Any
such hedging transactions could take a variety of forms, including interest
rate swap contracts, interest rate cap or floor contracts, futures or forward
contracts, and options. To the extent that ICCMIC enters into an interest rate
swap or cap contract to hedge any variable rate indebtedness incurred to
acquire or carry real estate assets, any periodic income or gain from the
disposition of such contract should be qualifying income for purposes of the
95% gross income test, but not the 75% gross income test. Furthermore, any
such contract would be considered a "security" for purposes of applying the
30% gross income test. To the extent that ICCMIC hedges with other types of
financial instruments or in other situations, it may not be entirely clear how
the income from those transactions will be treated for purposes of the various
income tests that apply to REITs under the Code. ICCMIC intends to structure
any hedging transactions in a manner that does not jeopardize its status as a
REIT. Accordingly, ICCMIC may conduct some or all of its hedging activities
through a corporate subsidiary that is fully subject to federal corporate
income tax. See "Proposed Legislation."
If ICCMIC fails to satisfy one or both of the 75% and 95% gross income tests
for any taxable year, it nevertheless may qualify as a REIT for such year if
it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if ICCMIC's failure to meet such tests
is due to reasonable cause and not due to willful neglect, ICCMIC attaches a
schedule of the sources of its income to its return, and ICCMIC anticipates
that any incorrect information on the schedule will not be due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances ICCMIC would be entitled to the benefit of such relief
provisions. As discussed above in "Federal Income Tax Considerations--Taxation
of the Company," even if such relief provisions apply, a 100% tax would be
imposed on the net income attributable to the greater
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of the amount by which ICCMIC fails the 75% or 95% gross income test. No such
relief is available for violations of the 30% income test.
ASSET TESTS. ICCMIC, at the close of each quarter of each taxable year, also
must satisfy, either directly or through partnerships in which it has an
interest, two tests relating to the nature of its assets. First, at least 75%
of the value of ICCMIC's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where ICCMIC raises new capital through stock or long-
term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following ICCMIC's receipt of such
capital. The term "real estate assets" includes interests in real property,
interests in mortgages on real property to the extent the principal balance of
a mortgage does not exceed the fair market value of the associated real
property, regular or residual interests in a REMIC (except that, if less than
95% of the assets of a REMIC consists of "real estate assets" (determined as
if ICCMIC held such assets), ICCMIC will be treated as holding directly its
proportionate share of the assets of such REMIC), and shares of other REITs.
For purposes of the 75% asset test, the term "interest in real property"
includes an interest in mortgage loans or land and improvements thereon, such
as buildings or other inherently permanent structures (including items that
are structural components of such buildings or structures), a leasehold of
real property, and an option to acquire real property (or a leasehold of real
property). An "interest in real property" also generally includes an interest
in mortgage loans secured by controlling equity interests in entities treated
as partnerships for federal income tax purposes that own real property, to the
extent that the principal balance of the mortgage does not exceed the fair
market value of the real property that is allocable to the equity interest.
Second, of the investments not included in the 75% asset class, the value of
any one issuer's securities owned by ICCMIC may not exceed 5% of the value of
ICCMIC's total assets, and ICCMIC may not own more than 10% of any one
issuer's outstanding voting securities (except for its interests in any
partnership and any qualified REIT subsidiary).
ICCMIC expects that any Distressed Real Properties, MBS Interests, Other
Real Estate Related Assets and temporary investments that it acquires
generally will be qualifying assets for purposes of the 75% asset test, except
to the extent that less than 95% of the assets of a REMIC in which ICCMIC owns
an interest consists of "real estate assets" and ICCMIC's proportionate share
of those assets includes assets that are nonqualifying assets for purposes of
the 75% asset test. Mortgage Loans (including Distressed Mortgage Loans,
Construction Loans and Mezzanine Loans) also will be qualifying assets for
purposes of the 75% asset test to the extent that the principal balance of
each mortgage loan does not exceed the value of the associated real property.
ICCMIC will monitor the status of the assets that it acquires for purposes of
the various asset tests and has represented that it will manage its portfolio
in order to comply at all times with such tests.
ICCMIC anticipates that it may securitize all or a portion of the Mortgage
Loans which it acquires, in which event ICCMIC will likely retain certain of
the subordinated and IO classes of MBS Interests which may be created as a
result of such securitization. The securitization of the Mortgage Loans may be
accomplished through one or more REMICs established by ICCMIC or, if a non-
REMIC securitization is desired, through one or more qualified REIT
subsidiaries established by ICCMIC. The securitization of the Mortgage Loans
through either one or more REMICs or one or more qualified REIT subsidiaries
will not affect the qualification of ICCMIC as a REIT or result in the
imposition of corporate income tax under the taxable mortgage pool rules.
If ICCMIC should fail to satisfy the asset tests at the end of a calendar
quarter, such a failure would not cause it to lose its REIT status if (i) it
satisfied the asset tests at the close of the preceding calendar quarter and
(ii) the discrepancy between the value of ICCMIC's assets and the asset test
requirements arose from changes in the market values of its assets and was not
wholly or partly caused by the acquisition of one or more non-qualifying
assets. If the condition described in clause (ii) of the preceding sentence
were not satisfied, ICCMIC still could avoid disqualification by eliminating
any discrepancy within 30 days after the close of the calendar quarter in
which it arose.
DISTRIBUTION REQUIREMENTS. ICCMIC, in order to avoid corporate income
taxation of the earnings that it distributes, is required to distribute with
respect to each taxable year dividends (other than capital gain dividends)
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to its stockholders in an aggregate amount at least equal to (i) the sum of
(A) 95% of its "REIT taxable income" (computed without regard to the dividends
paid deduction and its net capital gain) and (B) 95% of the net income (after
tax), if any, from foreclosure property, minus (ii) the sum of certain items
of noncash income. Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before ICCMIC
timely files its federal income tax return for such year and if paid on or
before the first regular dividend payment date after such declaration. To the
extent that ICCMIC does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax thereon at regular ordinary and capital
gains corporate tax rates. Furthermore, if ICCMIC should fail to distribute
during each calendar year (or, in the case of distributions with declaration
and record dates falling in the last three months of the calendar year, by the
end of the January immediately following such year) at least the sum of (i)
85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain net income for such year, and (iii) any undistributed taxable income from
prior periods, ICCMIC would be subject to a 4% nondeductible excise tax on the
excess of such required distribution over the amounts actually distributed.
ICCMIC intends to make timely distributions sufficient to satisfy the annual
distribution requirements.
It is possible that, from time to time, ICCMIC may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of
such expenses in arriving at its REIT taxable income. For example, ICCMIC will
recognize taxable income in excess of its cash receipts when, as frequently
happens, OID accrues with respect to certain of its subordinated MBS
Interests, including POs and certain IOs. OID generally will be accrued using
a methodology that does not allow credit losses to be reflected until they are
actually incurred. In addition, ICCMIC may recognize taxable market discount
income upon the receipt of proceeds from the disposition of, or principal
payments on, MBS Interests and Distressed Mortgage Loans that are "market
discount bonds" (i.e., obligations with a stated redemption price at maturity
that is greater than ICCMIC's tax basis in such obligations), but not have any
cash because such proceeds may be used to make non-deductible principal
payments on related borrowings. Market discount income is treated as ordinary
income and not as capital gain and, thus, is subject to the 95% distribution
requirement. ICCMIC also may recognize Excess Inclusion or other taxable
income in excess of cash flow from REMIC Residual Interests or its retained
interests from non-REMIC securitization transactions. It also is possible
that, from time to time, ICCMIC may recognize net capital gain attributable to
the sale of depreciated property that exceeds its cash receipts from the sale.
In addition, pursuant to certain Treasury Regulations, ICCMIC may be required
to recognize the amount of any payment to be made pursuant to a shared
appreciation provision over the term of the related loan using the constant
yield method. Finally, ICCMIC may recognize taxable income without receiving a
corresponding cash distribution if it forecloses on or makes a "significant
modification" (as defined in Regulations section 1.1001-3(e)) to a loan, to
the extent that the fair market value of the underlying property or the
principal amount of the modified loan, as applicable, exceeds ICCMIC's basis
in the original loan. Therefore, ICCMIC may have less cash than is necessary
to meet its annual 95% distribution requirement or to avoid corporate income
tax or the excise tax imposed on certain undistributed income. In such a
situation, ICCMIC may find it necessary to arrange for short-term (or possibly
long-term) borrowings or to raise funds through the issuance of Preferred
Stock or additional Common Stock, or through the sale of assets.
As a result of the securitization or resecuritization of Mortgage Loans or
other debt instruments, and the subsequent sale of the senior (or most secure)
securities created in the securitization, ICCMIC may retain subordinated
securities or a residual interest in the assets being securitized on which
interest or discount income will be accrued without the current payment of
cash. This situation could arise because cash payments received on the assets
are required to be paid to the holders of senior securitized interests. In
addition, ICCMIC would have phantom income to the extent of the market
discount attributable to debt securities held by a REMIC in which ICCMIC holds
a REMIC Residual Interest. In such situations, the income related to such
subordinate debt instruments will be subject to the 95% distribution
requirement. In order to satisfy the REIT distribution requirements, ICCMIC
may need to distribute funds obtained through borrowing, the issuance of
additional capital stock or the sale of assets. As a result, the maintenance
of REIT status could affect the manner in which the REIT conducts its business
operations.
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Under certain circumstances, ICCMIC may be able to rectify a failure to meet
the distribution requirements for a year by paying "deficiency dividends" to
its stockholders in a later year, which may be included in ICCMIC's deduction
for dividends paid for the earlier year. Although ICCMIC may be able to avoid
being taxed on amounts distributed as deficiency dividends, it will be
required to pay to the Service interest based upon the amount of any deduction
taken for deficiency dividends.
RECORDKEEPING REQUIREMENTS. Pursuant to applicable Treasury Regulations, in
order to be able to elect to be taxed as a REIT, ICCMIC must maintain certain
records and request on an annual basis certain information from its
stockholders designed to disclose the actual ownership of its outstanding
stock. ICCMIC intends to comply with such requirements.
FAILURE TO QUALIFY
If ICCMIC fails to qualify for taxation as a REIT in any taxable year, and
the relief provisions do not apply, ICCMIC will be subject to tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. Distributions to ICCMIC's stockholders in any year in which
ICCMIC fails to qualify as a REIT will not be deductible by ICCMIC nor will
they be required to be made. In such event, to the extent of ICCMIC's current
and accumulated earnings and profits, all distributions to stockholders will
be taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, ICCMIC also
will be disqualified from taxation as a REIT for the four taxable years
following the year during which ICCMIC ceased to qualify as a REIT. It is not
possible to state whether in all circumstances ICCMIC would be entitled to
such statutory relief. See "Proposed Legislation."
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As long as ICCMIC qualifies as a REIT, distributions made to ICCMIC's
taxable U.S. stockholders out of current or accumulated earnings and profits
(and not designated as capital gain dividends) will be taken into account by
such U.S. stockholders as ordinary income and will not be eligible for the
dividends received deduction generally available to corporations. As used
herein, the term "U.S. stockholder" means a holder of Common Stock that for
U.S. federal income tax purposes is (i) a citizen or resident of the U.S.,
(ii) a corporation, partnership, or other entity created or organized in or
under the laws of the U.S. or of any political subdivision thereof, (iii) an
estate whose income from sources without the United States is includible in
gross income for U.S. federal income tax purposes regardless of its connection
with the conduct of a trade or business within the United States, or (iv) any
trust with respect to which (A) a U.S. court is able to exercise primary
supervision over the administration of such trust and (B) one or more U.S.
fiduciaries have the authority to control all substantial decisions of the
trust. Distributions that are designated as capital gain dividends will be
taxed as long-term capital gains (to the extent they do not exceed ICCMIC's
actual net capital gain for the taxable year) without regard to the period for
which the stockholder has held his Common Stock. However, corporate
stockholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. Distributions in excess of current and
accumulated earnings and profits will not be taxable to a stockholder to the
extent that they do not exceed the adjusted basis of the stockholder's Common
Stock, but rather will reduce the adjusted basis of such stock. To the extent
that such distributions in excess of current and accumulated earnings and
profits exceed the adjusted basis of a stockholder's Common Stock, such
distributions will be included in income as long-term capital gain (or short-
term capital gain if the Common Stock had been held for one year or less),
assuming the Common Stock is a capital asset in the hands of the stockholder.
In addition, any distribution declared by ICCMIC in October, November, or
December of any year and payable to a stockholder of record on a specified
date in any such month shall be treated as both paid by ICCMIC and received by
the stockholder on December 31 of such year, provided that the distribution is
actually paid by ICCMIC during January of the following calendar year.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of ICCMIC. Instead, such losses would be
carried over by ICCMIC for potential offset against its future income
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(subject to certain limitations). Taxable distributions from ICCMIC and gain
from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, stockholders generally will not be able to
apply any "passive activity losses" (such as losses from certain types of
limited partnerships in which a stockholder is a limited partner) against such
income. In addition, taxable distributions from ICCMIC generally will be
treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of Common Stock (or
distributions treated as such), however, will be treated as investment income
only if the stockholder so elects, in which case such capital gains will be
taxed at ordinary income rates. ICCMIC will notify stockholders after the
close of ICCMIC's taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income or capital gain
dividends.
ICCMIC's investment in MBS Interests and certain types of MBS may cause it
under certain circumstances to recognize phantom income and to experience an
offsetting excess of economic income over its taxable income in later years.
As a result, stockholders may from time to time be required to pay federal
income tax on distributions that economically represent a return of capital,
rather than a dividend. Such distributions would be offset in later years by
distributions representing economic income that would be treated as returns of
capital for federal income tax purposes. Accordingly, if ICCMIC receives
phantom income, its stockholders may be required to pay federal income tax
with respect to such income on an accelerated basis, i.e., before such income
is realized by the stockholders in an economic sense. Taking into account the
time value of money, such an acceleration of federal income tax liabilities
would cause stockholders to receive an after-tax rate of return on an
investment in ICCMIC that would be less than the after-tax rate of return on
an investment with an identical before-tax rate of return that did not
generate phantom income. For example, if an investor subject to an effective
income tax rate of 30% purchased a bond (other than a tax-exempt bond) with an
annual interest rate of 10% for its face value, his before-tax return on his
investment would be 10%, and his after-tax return would be 7%. However, if the
same investor purchased stock of ICCMIC at a time when the before-tax rate of
return was 10%, his after-tax rate of return on his stock might be somewhat
less than 7% as a result of ICCMIC's phantom income. In general, as the ratio
of ICCMIC's phantom income to its total income increases, the after-tax rate
of return received by a taxable stockholder of ICCMIC will decrease. ICCMIC
will consider the potential effects of phantom income on its taxable
stockholders in managing its investments.
If ICCMIC owns REMIC Residual Interests, it is possible that stockholders
would not be permitted to offset certain portions of the dividend income they
derive from ICCMIC with their current deductions or net operating loss
carryovers or carrybacks. The portion of a stockholder's dividends that would
be subject to this limitation would equal his allocable share of any Excess
Inclusion income derived by ICCMIC with respect to the REMIC Residual
Interests. ICCMIC's Excess Inclusion income for any calendar quarter will
equal the excess of its income from REMIC Residual Interests over its "daily
accruals" with respect to such REMIC Residual Interests for the calendar
quarter. Daily accruals for a calendar quarter are computed by allocating to
each day on which a REMIC Residual Interest is owned a ratable portion of the
product of (i) the "adjusted issue price" of the REMIC Residual Interest at
the beginning of the quarter and (ii) 120% of the long-term federal interest
rate (adjusted for quarterly compounding) on the date of issuance of the REMIC
Residual Interest. The adjusted issue price of a REMIC Residual Interest at
the beginning of a calendar quarter equals the original issue price of the
REMIC Residual Interest, increased by the amount of daily accruals for prior
quarters and decreased by all prior distributions to ICCMIC with respect to
the REMIC Residual Interest. To the extent provided in future Treasury
regulations, the Excess Inclusion income with respect to any REMIC Residual
Interests owned by ICCMIC that do not have significant value will equal the
entire amount of the income derived from such REMIC Residual Interests.
Furthermore, to the extent that ICCMIC (or a qualified REIT subsidiary)
acquires or originates Mortgage Loans and uses those loans to collateralize
one or more multiple-class offerings of MBS for which no REMIC election is
made ("Non-REMIC Transactions"), it is possible that, to the extent provided
in future Treasury regulations, stockholders will not be permitted to offset
certain portions of the dividend income that they derive from ICCMIC that are
attributable to Non-REMIC Transactions with current deductions or net
operating loss carryovers or carrybacks. Although no applicable Treasury
regulations have yet been issued, no assurance can be provided that such
regulations will not be issued in the future or that, if issued, such
regulations will not prevent ICCMIC's stockholders from offsetting some
portion of their dividend income with deductions or losses from other sources.
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TAXATION OF STOCKHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a stockholder who is not a dealer in securities will be
treated as long-term capital gain or loss if the Common Stock has been held
for more than one year and otherwise as short-term capital gain or loss.
However, any loss upon a sale or exchange of Common Stock by a stockholder who
has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent of
distributions from ICCMIC required to be treated by such stockholder as long-
term capital gain. All or a portion of any loss realized upon a taxable
disposition of the Common Stock may be disallowed if other shares of Common
Stock are purchased within 30 days before or after the disposition.
CAPITAL GAINS AND LOSSES
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is
39.6%, and the tax rate on long-term capital gains applicable to individuals
is 28%. Thus, the tax rate differential between capital gain and ordinary
income for individuals may be significant. In addition, the characterization
of income as capital gain or ordinary income may affect the deductibility of
capital losses. Capital losses not offset by capital gains may be deducted
against an individual's ordinary income only up to a maximum annual amount of
$3,000. Unused capital losses may be carried forward indefinitely by
individuals. All net capital gain of a corporate taxpayer is subject to tax at
ordinary corporate rates. A corporate taxpayer can deduct capital losses only
to the extent of capital gains, with unused losses being carried back three
years and forward five years.
Under proposed tax legislation which has passed both the House and the
Senate (in different forms) as part of the Revenue Reconciliation Act of 1997,
the maximum tax rate on long-term capital gains would be reduced from 28% to
20%; the House version of this legislation also includes provisions for
indexing basis in certain situations. The proposed reductions in the capital
gains rate would apply to sales or exchanges occurring after May 6, 1997.
There can be no assurances concerning (i) whether legislation will be enacted
which reduces the maximum tax rate on capital gains, (ii) what the effective
date of such reduction will be, or (iii) the assets to which such reduced
capital gains rate will apply. The opinion of Sonnenschein Nath & Rosenthal
will not address any proposed legislation unless such legislation has been
passed by Congress and signed into law by the President prior to the effective
date hereof.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
ICCMIC will report to its U.S. stockholders and to the Service the amount of
distributions paid during each calendar year, and the amount of tax withheld,
if any. Under the backup withholding rules, a stockholder may be subject to
backup withholding at the rate of 31% with respect to distributions paid
unless such holder (i) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with the applicable requirements of
the backup withholding rules. A stockholder who does not provide ICCMIC with
his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be
creditable against the stockholder's income tax liability. In addition, ICCMIC
may be required to withhold a portion of capital gain distributions to any
stockholders who fail to certify their nonforeign status to ICCMIC. The
Treasury Department issued proposed regulations in April 1996 regarding the
backup withholding rules as applied to Non-U.S. Stockholders. The proposed
regulations would alter the current system of backup withholding compliance
and are proposed to be effective for distributions made after December 31,
1997. See "--Taxation of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their unrelated business taxable income ("UBTI"). While many investments in
real estate
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generate UBTI, the Service has issued a published ruling that dividend
distributions from a REIT to an exempt employee pension trust do not
constitute UBTI, provided that the shares of the REIT are not otherwise used
in an unrelated trade or business of the exempt employee pension trust. Based
on that ruling, amounts distributed by ICCMIC to Exempt Organizations
generally should not constitute UBTI. However, if an Exempt Organization
finances its acquisition of the Common Stock with debt, a portion of its
income from ICCMIC will constitute UBTI pursuant to the "debt-financed
property" rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under paragraphs (7), (9),
(17), and (20), respectively, of Code section 501(c) are subject to different
UBTI rules, which generally will require them to characterize distributions
from ICCMIC as UBTI. In addition, in certain circumstances, a pension trust
that owns more than 10% of ICCMIC's stock is required to treat a percentage of
the dividends from ICCMIC as UBTI (the "UBTI Percentage"). The UBTI Percentage
is the gross income derived by ICCMIC from an unrelated trade or business
(determined as if ICCMIC were a pension trust) divided by the gross income of
ICCMIC for the year in which the dividends are paid. The UBTI rule applies to
a pension trust holding more than 10% of ICCMIC's stock only if (i) the UBTI
Percentage is at least 5%, (ii) ICCMIC qualifies as a REIT by reason of the
modification of the 5/50 Rule that allows the beneficiaries of the pension
trust to be treated as holding shares of ICCMIC in proportion to their
actuarial interests in the pension trust, and (iii) either (A) one pension
trust owns more than 25% of the value of ICCMIC's stock or (B) a group of
pension trusts individually holding more than 10% of the value of ICCMIC's
stock collectively owns more than 50% of the value of ICCMIC's stock. ICCMIC's
ownership limitations should prevent an Exempt Organization from owning more
than 10% of the value of ICCMIC's stock.
Any dividends received by an Exempt Organization that are allocable to
Excess Inclusion will be treated as UBTI. In addition, ICCMIC will be subject
to tax at the highest marginal corporate rate on the portion of any Excess
Inclusion income derived by ICCMIC from REMIC Residual Interests that is
allocable to stock of ICCMIC held by Disqualified Organizations. Any such tax
would be deductible by ICCMIC against its income that is not Excess Inclusion
income.
If ICCMIC derives Excess Inclusion income from REMIC Residual Interests, a
tax similar to the tax on ICCMIC described in the preceding paragraph may be
imposed on stockholders who are (i) pass-through entities (i.e., partnerships,
estates, trusts, regulated investment companies, REITs, common trust funds,
and certain types of cooperatives (including farmers' cooperatives described
in section 521 of the Code)) in which a Disqualified Organization is a record
holder of shares or interests and (ii) nominees who hold Common Stock on
behalf of Disqualified Organizations. Consequently, a brokerage firm that
holds shares of Common Stock in a "street name" account for a Disqualified
Organization may be subject to federal income tax on the Excess Inclusion
income derived from those shares.
The Treasury Department has been authorized to issue regulations regarding
issuances by a REIT of multiple-class mortgage-backed securities in non-REMIC
transactions. If such Treasury regulations are issued in the future allocating
ICCMIC's Excess Inclusion income from non-REMIC transactions pro rata among
its stockholders, some percentage of the dividends paid by ICCMIC would be
treated as UBTI in the hands of stockholders that are Exempt Organizations.
See "--Taxation of Taxable U.S. Stockholders."
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex and no
attempt will be made herein to provide more than a summary of such rules.
PROSPECTIVE NON-U.S. STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS
TO DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH
REGARD TO AN INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING
REQUIREMENTS.
Distributions to Non-U.S. Stockholders that are not attributable to gain
from sales or exchanges by ICCMIC of U.S. real property interests and are not
designated by ICCMIC as capital gains dividends will be treated as
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dividends of ordinary income to the extent that they are made out of current
or accumulated earnings and profits of ICCMIC. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Common Stock is treated as
effectively connected with the Non-U.S. Stockholder's conduct of a U.S. trade
or business, the Non-U.S. Stockholder generally will be subject to federal
income tax at graduated rates, in the same manner as U.S. stockholders are
taxed with respect to such distributions (and also may be subject to the 30%
branch profits tax in the case of a Non-U.S. Stockholder that is a non-U.S.
corporation). ICCMIC expects to withhold U.S. income tax at the rate of 30% on
the gross amount of any such distributions made to a Non-U.S. Stockholder
unless (i) a lower treaty rate applies and any required form evidencing
eligibility for that reduced rate is filed with ICCMIC or (ii) the Non-U.S.
Stockholder files an IRS Form 4224 with ICCMIC claiming that the distribution
is effectively connected income. The Treasury Department issued proposed
regulations in April 1996 that would modify the manner in which ICCMIC
complies with the withholding requirements.
Any portion of the dividends paid to Non-U.S. Stockholders that is treated
as Excess Inclusion income will not be eligible for exemption from the 30%
withholding tax or a reduced treaty rate. In addition, if Treasury regulations
are issued in the future allocating ICCMIC's Excess Inclusion income from non-
REMIC transactions among its stockholders, some percentage of ICCMIC's
dividends would not be eligible for exemption from the 30% withholding tax or
a reduced treaty withholding tax rate in the hands of non-U.S. Stockholders.
See "--Taxation of Taxable U.S. Stockholders."
Distributions in excess of current and accumulated earnings and profits of
ICCMIC will not be taxable to a stockholder to the extent that such
distributions do not exceed the adjusted basis of the stockholder's Common
Stock, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. Stockholder's Common Stock, such
distributions will give rise to tax liability if the Non-U.S. Stockholder
would otherwise be subject to tax on any gain from the sale or disposition of
his Common Stock, as described below. Because it generally cannot be
determined at the time a distribution is made whether or not such distribution
will be in excess of current and accumulated earnings and profits, the entire
amount of any distribution normally will be subject to withholding at the same
rate as a dividend. However, amounts so withheld are refundable to the extent
it is determined subsequently that such distribution was, in fact, in excess
of current and accumulated earnings and profits of ICCMIC. In August 1996, the
U.S. Congress passed the Small Business Job Protection Act of 1996, which
requires ICCMIC to withhold 10% of any distribution in excess of ICCMIC's
current and accumulated earnings and profits. Consequently, although ICCMIC
intends to withhold at a rate of 30% on the entire amount of any distribution,
to the extent that ICCMIC does not do so, any portion of a distribution not
subject to withholding at a rate of 30% will be subject to withholding at a
rate of 10%.
For any year in which ICCMIC qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges by ICCMIC of U.S. real property
interests (which includes certain interests in Real Property but does not
include Mortgage Loans or MBS) will be taxed to a Non-U.S. Stockholder under
the provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of
U.S. real property interests are taxed to a Non-U.S. Stockholder as if such
gain were effectively connected with a U.S. business. Non-U.S. Stockholders
thus would be taxed at the normal capital gain rates applicable to U.S.
stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals).
Distributions subject to FIRPTA also may be subject to the 30% branch profits
tax in the hands of a non-U.S. corporate stockholder not entitled to treaty
relief or exemption. ICCMIC is required to withhold 35% of any distribution
that is designated by ICCMIC as a capital gains dividend. The amount withheld
is creditable against the Non-U.S. Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of his Common Stock
generally will not be taxed under FIRPTA if ICCMIC is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by non-U.S. persons. However, because the Common Stock will be
publicly traded, no assurance can be given that
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ICCMIC will be or remain a "domestically controlled REIT." In addition, a Non
U.S. Stockholder that owns, actually or constructively, 5% or less of the
Company's stock throughout a specified "look-back" period will not recognize
the gain on the sale of his stock taxable under FIRPTA if the shares are
traded on an established securities market. Furthermore, gain not subject to
FIRPTA will be taxable to a Non-U.S. Stockholder if (i) investment in the
Common Stock is effectively connected with the Non-U.S. Stockholder's U.S.
trade or business, in which case the Non-U.S. Stockholder will be subject to
the same treatment as U.S. stockholders with respect to such gain, or (ii) the
Non-U.S. Stockholder is a nonresident alien individual who was present in the
U.S. for 183 days or more during the taxable year and certain other conditions
apply, in which case the nonresident alien individual will be subject to a 30%
tax on the individual's capital gains. If the gain on the sale of the Common
Stock were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder
would be subject to the same treatment as U.S. stockholders with respect to
such gain (subject to applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals, and the
possible application of the 30% branch profits tax in the case of non-U.S.
corporations).
STATE AND LOCAL TAXES
ICCMIC or ICCMIC's stockholders may be subject to state and local tax in
various states and localities, including those states and localities in which
it or they transact business, own property, or reside. The state and local tax
treatment of the Company and its stockholders in such jurisdictions may differ
from the federal income tax treatment described above. Consequently,
prospective stockholders should consult their own tax advisors regarding the
effect of state and local tax laws upon an investment in the Common Stock.
SALE OF THE COMPANY'S PROPERTY
Any gain realized by ICCMIC on the sale of any property held as inventory or
other property held primarily for sale to customers in the ordinary course of
its trade or business will be treated as income from a prohibited transaction
that is subject to a 100% penalty tax. Such prohibited transaction income also
may have an adverse effect upon ICCMIC's ability to satisfy the income tests
for REIT status. See "--Requirements For Qualification--Income Tests" above.
ICCMIC, however, does not presently intend to acquire or hold a material
amount of property that represents inventory or other property held primarily
for sale to customers in the ordinary course of ICCMIC's trade or business.
INVESTMENT IN FOREIGN ASSETS
ICCMIC may invest in foreign property or in mortgages secured by foreign
property. Investment in foreign property or in mortgages secured by foreign
property will not affect ICCMIC's status as a REIT for United States tax
purposes. Because foreign jurisdictions do not recognize REITs for their own
tax purposes, ICCMIC may be subject to tax based on activities in foreign
jurisdictions and on interest income received on mortgages secured by foreign
property. The payment of such foreign taxes by ICCMIC would not provide a
credit to ICCMIC's shareholders for U.S. tax purposes.
PROPOSED LEGISLATION
Under proposed tax legislation which has passed both the House and the
Senate (in different forms) as part of the Revenue Reconciliation Act of 1997,
various changes would be made to the tax treatment of REITs. Set forth below
is a summary of these proposed legislative changes. There can be no assurances
regarding (i) whether legislation will be enacted, (ii) the effective date of
such legislation, if any, or (iii) the contents of such legislation. The
opinion of Sonnenschein Nath & Rosenthal will not address any proposed
legislation unless such legislation has been passed by Congress and signed
into law by the President prior to the effective date hereof.
a. Maximum Number of Shareholders. Under the proposed legislation, the rule
that disqualifies a REIT for any year in which the REIT failed to comply with
regulations to ascertain its ownership would be replaced with an intermediate
penalty for failing to do so. The penalty would be $25,000 ($50,000 for
intentional
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violations) for any year in which the REIT did not comply with the ownership
regulations. The REIT would also be required, when requested by the IRS, to
send curative demand letters. In addition, a REIT that complied with the
regulations for ascertaining its ownership, and which did not know, or have
reason to know, that it was so closely held as to be classified as a personal
holding company would not be treated as a personal holding company.
b. De Minimis Tenant Service Income. Under the proposed legislation, a REIT
would be permitted to render a de minimis amount of impermissible services to
tenants, or to manage or operate property, and still treat amounts received
with respect to that property as rent. The amount received with respect to the
impermissible services or management could not exceed one percent of the
REIT's gross income from the property. For these purposes, the services could
not be valued at less than 150 percent of the REIT's direct cost of the
services.
c. Attribution of Ownership. Under the proposed legislation, for purposes of
determining whether a tenant is a "Related Party Tenant," a partner's
ownership only is attributed to a partnership if the partner owns 25% or more
of the capital or profits interests in that partnership.
d. Credit for Tax on Retained Capital Gains. The proposed legislation would
permit a REIT to elect to retain and pay income tax on net long-term capital
gains it received. If a REIT made this election, the REIT shareholders would
include in their income as long-term capital gains their proportionate share
of the long-term capital gains as designated by the REIT. The shareholder
would be deemed to have paid the shareholder's share of the tax, which could
be credited or refunded to the shareholder. The basis of the shareholder's
shares would be increased by the amount of the undistributed long-term capital
gains (less the amount of capital gains tax paid by the REIT) included in the
shareholder's long-term capital gains.
e. Repeal of 30-Percent Gross Income Requirement. The proposed legislation
would repeal the rule that requires less than 30 percent of the REIT's income
to be derived from gain on the sale or other disposition of stock or
securities held for less than one year, certain real property held less than
four years, and property that is sold or disposed of in a prohibited
transaction.
f. Earnings and Profits from Non-REIT Years. The proposed legislation would
change the ordering rule for purposes of the requirement that newly-electing
REITs distribute earnings and profits that were accumulated in non-REIT years.
g. Treatment of Foreclosure Property. The proposed legislation would
lengthen the grace period for foreclosure property from two years to the end
of the third full taxable year following the election, with the possibility
that the IRS could extend the grace period for three additional years. A REIT
could revoke an election to treat property as foreclosure property for any
taxable year by filing a revocation on or before its due date for filing its
tax return. In addition, the proposed legislation would conform the definition
of independent contractors for the foreclosure property rule to the definition
of independent contractors for general rules.
h. Payments under Hedging Instruments. The proposed legislation would treat
income and gain from all hedges that reduce the interest rate risk of REIT
liability, and not just from interest rate swaps and caps, as qualifying
income under the 95% gross income test.
i. Excess Non-Cash Income. The proposed legislation would (i) expand the
class of excess noncash items that are not subject to the 95% distribution
requirement to include income from the cancellation of indebtedness, and (ii)
extend the treatment of original issue discount and coupon interest as excess
noncash items to REITs that use an accrual method of accounting.
j. Prohibited Transaction Safe Harbor. The proposed legislation would
exclude from the prohibited sales rules any property that was involuntarily
converted.
k. Shared Appreciation Mortgages. The proposed legislation would provide
that interest received on a shared appreciation mortgage is not subject to the
tax on prohibited transactions where the property subject to
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the mortgage is sold within four years of the REIT's acquisition of the
mortgage pursuant to a bankruptcy plan of the mortgagor unless the REIT, when
it acquired the mortgage, knew or had reason to know that the property subject
to the mortgage would be sold in a bankruptcy proceeding.
l. REIT Subsidiaries. The proposed legislation would permit any corporation
wholly-owned by a REIT to be treated as a qualified REIT subsidiary,
regardless of whether the corporation had always been owned by the REIT. If
the REIT acquired an existing corporation, the proposed legislation would
treat such corporation as being liquidated at the time of acquisition by the
REIT and then reincorporated, so that any pre-REIT built-in gains would be
taxed. In addition, any pre-REIT earnings and profits of the subsidiary must
be distributed before the end of the REIT's taxable year.
m. Effective Date. The proposed legislation would be effective for taxable
years beginning after the date of enactment.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
prohibited transaction provisions of section 4975 of the Code, that may be
relevant to a prospective purchaser of Common Stock in ICCMIC (including, with
respect to the discussion contained in "--Status of ICCMIC under ERISA," to a
prospective purchaser that is not an employee benefit plan, another tax-
qualified retirement plan, or an individual retirement account ("IRA")). The
discussion contained herein does not purport to deal with all aspects of ERISA
or section 4975 of the Code that may be relevant to particular stockholders
(including plans subject to Title I of ERISA, other retirement plans and IRAs
subject to the prohibited transaction provisions of section 4975 of the Code,
and governmental plans or church plans that are exempt from ERISA and section
4975 of the Code but that may be subject to state law requirements) in light
of their particular circumstances.
The statements in this discussion are based on current provisions of ERISA
and the Code, existing and currently proposed regulations promulgated under
ERISA and the Code, the legislative history of ERISA and the Code, existing
administrative rulings of the Department of Labor ("DOL"), and reported
judicial decisions. No assurance can be given that future legislative,
judicial, or administrative actions or decisions, which may be retroactive in
effect, will not affect the accuracy of any statements in this Prospectus with
respect to transactions entered into or contemplated prior to the effective
date of such changes.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON STOCK ON BEHALF OF A
PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, OR AN IRA SHOULD CONSULT HIS OWN LEGAL ADVISOR REGARDING THE
SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND
STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON STOCK
BY SUCH PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS, AND IRAS
Each fiduciary of a pension, profit-sharing, or other employee benefit plan
(a "Plan") subject to Title I of ERISA should consider carefully whether an
investment in the Common Stock is consistent with his fiduciary
responsibilities under ERISA. In particular, the fiduciary requirements of
Part 4 of Title IB of ERISA require a Plan's investment to be (i) prudent and
in the best interests of the Plan, its participants, and its beneficiaries,
(ii) diversified in order to minimize the risk of large losses, unless it is
clearly prudent not to diversify, and (iii) permitted under the terms of the
Plan's governing documents (provided the documents are consistent with ERISA).
In determining whether an investment in the Common Stock is prudent for
purposes of ERISA, the appropriate fiduciary of a Plan should consider all of
the facts and circumstances, including whether the investment is reasonably
designed, as a part of the Plan's portfolio for which the fiduciary has
investment
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responsibility, to further the purposes of the Plan, taking into consideration
the risk of loss and opportunity for gain (or other return) from the
investment, and the diversification, cash flow, and projected return relative
to the funding requirements of the Plan's portfolio. The fiduciary of a Plan
or of an IRA should also take into account the possible recognition of UBTI as
discussed under "Federal Tax Considerations--Taxation of Tax-Exempt
Shareholders."
The persons making the investment decisions for an IRA or for a qualified
retirement plan that is not subject to Title I of ERISA because it is a
governmental or church plan or because it does not cover common law employees
(a "Non-ERISA Plan") should consider that such an IRA or Non-ERISA Plan may
only make investments that are permitted by the appropriate governing
documents and under applicable state law.
Fiduciaries of Plans and persons making the investment decision for an IRA
or other Non-ERISA Plan should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their investment
decision. A "party in interest" or "disqualified person" with respect to an
Plan or with respect to a Plan (including a Non-ERISA Plan) or IRA subject to
section 4975 of the Code is subject to (i) an initial 10% excise tax on the
amount involved in any prohibited transaction involving the assets of the Plan
or IRA and (ii) an excise tax equal to 100% of the amount involved if any
prohibited transaction is not corrected. A "party in interest" or
"disqualified person" includes any fiduciary or person providing services to a
Plan or IRA, the employer maintaining the Plan (and a direct or indirect 50%
or more owner of the employer), a union representing employees covered by a
Plan, and various individuals and entities related to any of the foregoing. A
"prohibited transaction" includes (subject to certain exceptions) any direct
sale or exchange of property, extension of credit, or furnishing of goods or
facilities, between a plan and the party in interest or disqualified person;
and also includes the use of plan assets for the benefit of a party in
interest or disqualified person, or a self-dealing or kickback transaction by
a fiduciary. If the disqualified person who engages in the transaction is the
individual on behalf of whom an IRA is maintained (or his beneficiary), the
IRA will lose its tax-exempt status and its assets will be deemed to have been
distributed to such individual in a taxable distribution (though no excise tax
will be imposed) on account of the prohibited transaction. In addition, a
fiduciary who permits a Plan to engage in a transaction that the fiduciary
knows or should know is a prohibited transaction may be liable to the Plan for
any loss the Plan incurs as a result of the transaction or for any profits
earned by the fiduciary in the transaction.
STATUS OF ICCMIC UNDER ERISA
The following section discusses certain principles that apply in determining
whether the fiduciary requirements of ERISA, and the prohibited transaction
provisions of ERISA and the Code, apply to an entity and to transactions by
the entity because one or more investors in the equity interests in the entity
is a Plan or is a Non-ERISA Plan or IRA subject to section 4975 of the Code. A
Plan fiduciary also should consider the relevance of those principles to
ERISA's prohibition on improper delegation of control over, or responsibility
for, "plan assets" and ERISA's imposition of co-fiduciary liability on a
fiduciary who participates in, permits (by action or inaction) the occurrence
of, or fails to remedy, a known breach by another fiduciary.
If the assets of the Company are deemed to be "plan assets" under ERISA, (i)
the prudence standards and other provisions of Part 4 of Title I of ERISA
would be applicable to any transactions involving the Company's assets, (ii)
persons who exercise any authority over the Company's assets, or who provide
investment advice to the Company, would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each Plan that acquires
Common Stock, and transactions involving the Company's assets undertaken at
their direction or pursuant to their advice might violate their fiduciary
responsibilities under ERISA, especially with regard to conflicts of interest,
(iii) a fiduciary exercising his investment discretion over the assets of a
Plan to cause it to acquire or hold the Common Stock could be liable under
Part 4 of Title I of ERISA for transactions entered into by the Company that
do not conform to ERISA standards of prudence and fiduciary responsibility,
and (iv) certain transactions that the Company might enter into in the
ordinary course of its business and operations might constitute "prohibited
transactions" under ERISA and the Code.
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Regulations of the DOL defining "plan assets" (the "Plan Asset Regulations")
generally provide that when a Plan or Non-ERISA Plan or IRA acquires a
security that is an equity interest in an entity, and the security is neither
a "publicly-offered security" nor a security issued by an investment company
registered under the Investment Company Act of 1940, the Plan's or Non-ERISA
Plan's or IRA's assets include both the equity interest and an undivided
interest in each of the underlying assets of the issuer of such equity
interest, unless one or more exceptions specified in the Plan Asset
Regulations are satisfied.
The Plan Asset Regulations define a publicly-offered security as a security
that is "widely-held," "freely transferable," and either part of a class of
securities registered under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), or sold pursuant to an effective registration statement
under the Securities Act (provided the securities are registered under the
Exchange Act within 120 days after the end of the fiscal year of the issuer
during which the offering occurred). The Common Stock is being sold in an
offering registered under the Securities Act and will be registered under the
Exchange Act. The Plan Asset Regulations provide that a security is "widely
held" only if it is part of a class of securities that is owned by 100 or more
investors independent of the issuer and of one another. A security will not
fail to be widely held because the number of independent investors falls below
100 subsequent to the initial public offering as a result of events beyond the
issuer's control. The Company anticipates that upon completion of this
offering, the Common Stock will be "widely held."
The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment
is $10,000 or less (as is the case with this offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated in
the Plan Asset Regulations as not affecting that finding include: (i) any
restriction on or prohibition against any transfer or assignment that would
result in the termination or reclassification of an entity for federal or
state tax purposes, or that otherwise would violate any federal or state law
or court order, (ii) any requirement that advance notice of a transfer or
assignment be given to the issuer, (iii) any administrative procedure that
establishes an effective date, or an event (such as completion of an
offering), prior to which a transfer or assignment will not be effective, and
(iv) any limitation or restriction on transfer or assignment that is not
imposed by the issuer or a person acting on behalf of the issuer. The Company
believes that the restrictions imposed under the Charter on the transfer of
ICCMIC's stock will not result in the failure of the Common Stock to be
"freely transferable." The Company also is not aware of any other facts or
circumstances limiting the transferability of the Common Stock that are not
enumerated in the Plan Asset Regulations as those not affecting free
transferability. However, no assurance can be given that the DOL or the
Treasury Department could not reach a contrary conclusion.
Assuming that the Common Stock will be "widely held" and that no other facts
and circumstances other than those referred to in the preceding paragraph
exist that restrict transferability of the Common Stock, the shares of Common
Stock should be publicly offered securities and the assets of the Company
should not be deemed to be "plan assets" of any Plan, IRA, or Non-ERISA Plan
that invests in the Common Stock.
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
AND REAL PROPERTY INVESTMENTS
The Company intends primarily to acquire Mortgage Loans and MBS Interests,
but also may acquire Other Real Estate Related Assets and, in certain
circumstances, Non Real Estate Assets. The Company's return on Mortgage Loans
it acquires will depend upon, among other things, the ability of the servicer
of the Mortgage Loans to foreclose upon those Mortgage Loans in default and,
if it is the successful bidder at the foreclosure sale, thereafter to sell the
underlying Real Property. Moreover, the Company's return on MBS Interests also
depends upon the ability of the servicer of the mortgage loans underlying the
MBS Interests to foreclose upon such loans.
There are a number of legal considerations involved in the acquisition and
origination of Mortgage Loans, MBS Interests and Other Real Estate Related
Assets, and the foreclosure and sale of defaulted Mortgage Loans (whether
individually or as part of a series of mortgage-backed securities), or Real
Property. The following discussion provides general summaries of certain legal
aspects of Mortgage Loans and Real Property. Because such legal aspects are
governed by applicable state law (which laws vary from state to state), the
summaries do not purport to be complete, to reflect the laws of any particular
state, or to encompass the laws of all states. Accordingly, the summaries are
qualified in their entirety by reference to the applicable laws of the states
where the property is located.
GENERAL
Each Mortgage Loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in Real Property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the
prevailing practice and law in the state in which the related Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." A mortgage creates a lien
upon, or grants a title interest in, the real property covered thereby, and
represents the security for the repayment of the indebtedness customarily
evidenced by a promissory note. The priority of the lien created or interest
granted will depend on the terms of the mortgage and, in some cases, on the
terms of separate subordination agreements or intercreditor agreements with
others that hold interests in the real property, the knowledge of the parties
to the mortgage and, generally, the order of recordation of the mortgage in
the appropriate public recording office. However, the lien of a recorded
mortgage generally will be subordinate to later-arising liens for real estate
taxes and assessments and other charges imposed under governmental police
powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage: 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 borrower), a trustee to whom the real property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust and generally with a power of sale, to the trustee to secure
repayment of the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. The grantor (the borrower) conveys title to
the real property to the grantee (the lender), generally with a power of sale,
until such time as the debt is repaid. 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 related instrument, the law of the state in which the real property is
located, certain federal laws and, in some deed of trust transactions, the
directions of the beneficiary.
INTERESTS IN REAL PROPERTY
The interests in real property typically covered by a mortgage, deed of
trust or deed to secure debt is most often the fee simple estate in land and
improvements. However, such instruments may encumber other interests in real
property such a tenant's interest in the lease of land or improvements, or
both, and the leasehold estate
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created by such lease. An instrument covering an interest in real property
other than the fee estate requires special provisions in the instrument
creating such interest or in the mortgage, deed of trust or deed to secure
debt, to protect the mortgagee against termination of such interest before the
mortgage, deed of trust or deed to secure debt is paid.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease
and the income derived therefrom, while (unless rents are to be paid directly
to the lender) retaining a revocable license to collect the rents for so long
as there is no default. If the borrower defaults, the license terminates and
the lender is entitled to collect the rents. Local law may require that the
lender take possession of the property, obtain a court-appointed receiver
and/or take some other enforcement action before becoming entitled to collect
the rents.
The potential payments from a property may be less than the periodic
payments due under the mortgage. For example, the net income that would
otherwise be generated from the property may be less than the amount that
would be needed to service the debt if the leases on the property are at
below-market rents, the market rents have fallen since the original financing,
vacancies have increased, or as a result of excessive or increased
maintenance, repair or other obligations to which a lender succeeds as
landlord.
CONDEMNATION AND INSURANCE
The form of the mortgage or deed of trust used by many lenders confers on
the mortgagee or beneficiary the right both to receive all proceeds collected
under any casualty 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 casualty 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
casualty insurance and partial condemnation awards to the secured
indebtedness. In such states, the mortgagor or trustor must be allowed to use
the proceeds of casualty 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.
FORECLOSURE
GENERAL. Foreclosure is a legal procedure that allows the lender to recover
its mortgage debt by enforcing its rights and available legal remedies under
the mortgage. If the borrower defaults in payment or performance of its
obligations under the note, mortgage or other loan documents, the lender
generally has the right to institute foreclosure proceedings to sell the real
property at public auction to satisfy the indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and non-judicial foreclosure pursuant to a power of sale granted in the
mortgage instrument. Other foreclosure procedures are available in some
states, such as strict foreclosure, but they are either infrequently used or
available only in limited circumstances.
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
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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. 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 requires several years to complete. When the
lender's right to foreclose is contested, the legal proceedings can be 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.
PUBLIC SALE. A third party may be unwilling to purchase a mortgaged property
at a public sale following judicial foreclosure 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. For
these reasons, it is common for the lender to purchase the mortgaged property
for an amount equal to or less than the underlying debt and accrued and unpaid
interests 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 mortgagors 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 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 make such repairs at its own expense as are necessary to render
the property suitable for sale. The costs of operating and maintaining a
commercial or multifamily residential property may be significant and may be
greater than the income derived from that property.
NON-JUDICIAL FORECLOSURE/POWER OF SALE. Foreclosure of a deed of trust is
generally accomplished by a non-judicial trustee's sale pursuant to a power of
sale typically granted in the deed of trust. A power of sale also may be
contained in any other type of mortgage instrument if applicable law so
permits. A power of sale under a deed of trust 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 default by the borrower and after
notice of sale is given in accordance with the terms of the mortgage and
applicable state law. The borrower or junior lienholder may then have the
right, during a reinstatement period required in some states, to cure the
default by paying the entire actual amount in arrears (without regard to the
acceleration of the indebtedness), plus the lender's expenses incurred in
enforcing the obligation. In other states, the borrower or the junior
lienholder is not provided a period to reinstate the loan, but has only the
right to pay off the entire debt to prevent the foreclosure sale. Generally,
state law governs the procedure for public sale, the parties entitled to
notice, the method of giving notice and the applicable time periods.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS. United States
courts have traditionally imposed general equitable principles to limit the
remedies available to lenders in foreclosure actions. These principles are
generally designed to relieve borrowers from the effects of mortgage defaults
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
or remedy an injustice, undue oppression or overreaching, or may require the
lender to undertake affirmative actions to determine the cause of the
borrower's default and the likelihood that the borrower 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 borrowers who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose in the case of a non-monetary default, such as a failure
to adequately maintain the mortgaged property or an impermissible further
encumbrance of the mortgaged property.
Even if the lender is successful in the foreclosure action and is able to
take possession of the property, the costs of operating and maintaining a
multifamily or commercial property may be significant and may be greater than
the income derived from that property. The costs of management and operation
of those mortgaged properties which are hotels, motels, restaurants, nursing
homes, convalescent homes or hospitals may be particularly significant because
of the expertise, knowledge and with respect to nursing or convalescent homes,
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regulatory compliance, required to run such operations and the effect which
foreclosure and a change in ownership may have with respect to consent
requirements and on the public's and the industry's (including franchisors')
perception of the quality of such operations. The lender also commonly will
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale or lease 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, because of the expenses
associated with acquiring, owning and selling a mortgaged property, a lender
could realize an overall loss on a mortgage loan even if the mortgaged
property is sold at foreclosure, or resold after it is acquired through
foreclosure, for an amount equal to the full outstanding principal amount of
the loan plus accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property does
so subject to senior mortgages and any other prior liens, and may be obliged
to keep senior mortgage loans current in order to avoid foreclosure of its
interest in the property. In addition, if the foreclosure of a junior mortgage
triggers the enforcement of a "due-on-sale" clause contained in a senior
mortgage, the junior mortgagee could be required to pay the full amount of the
senior mortgage indebtedness or face foreclosure.
POST-SALE REDEMPTION. In a majority of states, after sale pursuant to a deed
of trust or foreclosure of a mortgage, the borrower and foreclosed junior
lienors are given a statutory period in which to redeem the property. In some
states, statutory redemption may occur only upon payment of the foreclosure
sale price. In other states, redemption may be permitted if the former
borrower pays only a portion of the sums due. In some states, the borrower
retains possession of the property during the statutory redemption period. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property because the exercise of a right of
redemption would defeat the title of any purchaser through a foreclosure.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, including California, a post-
sale statutory right of redemption may exist following a judicial foreclosure,
but not following a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION. Any multifamily and commercial Mortgage Loans
acquired by the Company are likely to be nonrecourse loans, as to which
recourse in the case of default will be limited to the property and such other
assets, if any, that were pledged to secure the mortgage loan. However, even
if a mortgage loan by its terms provides for recourse to the borrower's other
assets, a lender's ability to realize upon those assets may be limited by
state law. For example, in some states (including California), a lender cannot
obtain a deficiency judgment against the borrower following sale under a deed
of trust by non-judicial means. Other statutes (including those of California)
may require the lender to exhaust the security afforded under a mortgage
before bringing a personal action against the borrower. In certain other
states, the lender has the option of bringing a personal action against the
borrower on the debt without first exhausting such security; however, in some
of those states, the lender, following judgment on such personal action, may
be deemed to have elected a remedy and thus may be precluded from foreclosing
upon the security. Consequently, lenders in those states where such an
election of remedy provision exists may choose to proceed first against the
security. Finally, other statutory provisions (including those of California),
designed to protect borrowers from exposure to large deficiency judgments that
might result from bidding at below-market values at the foreclosure sale,
limit any deficiency judgment to the excess of the outstanding debt over the
fair market value of the property at the time of the sale.
COOPERATIVES. Mortgage loans may be secured by a security interest on the
borrower's ownership interest in shares, and the proprietary leases
appurtenant thereto (or cooperative contract rights), allocable to cooperative
dwelling units that may be vacant or occupied by non-owner tenants. Such loans
are subject to certain risks not associated with mortgage loans secured by a
lien on the fee estate of a borrower in real property. Such a loan typically
is subordinate to the mortgage, if any, on the cooperative's building which,
if foreclosed, could extinguish the equity in the building and the proprietary
leases of the dwelling units derived from ownership of the shares of the
cooperative. Further, transfer of shares in a cooperative are subject to
various regulations as well as to restrictions (including transfer
restrictions) under the governing documents of the cooperative, and the shares
may be canceled in the event that associated maintenance charges due under the
related proprietary leases are not paid. Typically, a recognition agreement
between the lender and the cooperative provides, among other
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things, the lender with an opportunity to cure a default under a proprietary
lease but such recognition agreements may not have been obtained in the case
of all the mortgage loans secured by cooperative shares (or contract rights).
Under the laws applicable in many states, "foreclosure" on cooperative
shares is accomplished by a sale in accordance with the provisions of Article
9 of the UCC and the security agreement relating to the shares. Article 9 of
the UCC requires that a sale be conducted in a "commercially reasonable"
manner, which may be dependent upon, among other things, the notice given to
the debtor and the method, manner, time, place and terms of the sale. Article
9 of the UCC provides that the proceeds of the sale will be applied first to
pay the costs and expenses of the sale and then to satisfy the indebtedness
secured by the lender's security interest. A recognition agreement, however,
generally provides that the lender's right to reimbursement is subject to the
right of the cooperative to receive sums due under the proprietary leases.
GROUND LEASE 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 a fee estate. 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.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower to pay
a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges that a lender may collect from a borrower
for delinquent payments. Certain states also limit the amounts that a lender
may collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
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. The enforceability of due on sale clauses
has been subject of legislation or litigation in many states and, in some
cases, the enforceability of these clauses has been limited or denied.
However, with respect to certain loans, the Garn-St. Germain Depository
Institutions Act of 1982 pre-empts 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.
SUBORDINATE FINANCING
When a 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 can cause the senior lender to lose
its priority. For example, if the mortgagor and the senior lender agree to
increase 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 is harmed or the mortgagor is additionally burdened. Third, if the
mortgagor defaults on the senior loan and/or any junior
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loan or loans, the existence of junior loans and the action 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.
ACCELERATION ON DEFAULT
Some of the Mortgage Loans may include "Debt--Acceleration" clauses, which
permit the lender to accelerate the full debt upon a monetary or nonmonetary
default of the mortgagor. 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. Such courts, however, may refuse to
foreclose on a mortgage or deed of trust when an acceleration of the
indebtedness would be inequitable or unjust under the circumstances or would
render the acceleration unconscionable. Furthermore, in some states, the
mortgagor may avoid foreclosure and reinstate an accelerated loan by paying
only the defaulted amounts and the costs and attorneys' fees incurred by the
lender in collecting such defaulted payments.
CERTAIN LAWS AND REGULATIONS; TYPES OF MORTGAGED PROPERTY
The real property securing the Mortgage Loans 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 the Mortgaged Properties which could,
together with the possibility of limited alternative uses for a particular
property (e.g., a nursing home or convalescent home or hospital), result in
the failure to realize the full principal amount of the related Mortgage Loan.
Mortgages on properties which are owned by a mortgagor under a condominium
form of ownership are subject to declarations, bylaws and other regulations of
the condominium association. Mortgaged properties which are hotels or motels
may present additional risks in that hotels and motels are typically operated
pursuant to franchise, management and operating agreements which may be
terminated by the operator, and the transferability of the hotel's operating
liquor and other licenses to the entity acquiring the hotel either through
purchases or foreclosure is subject to the peculiarities of local law
requirements. In addition, mortgaged properties which are multifamily
residential properties may be subject to rent control laws, which could impact
the future cash flows of such properties.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980 ("Title V") provides that state usury limitations shall not apply to
certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any
state to 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.
BANKRUPTCY LAWS
Operation of 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) to
collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy 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 lien holder
or may stay the senior lender from taking action to foreclose out such junior
lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a
mortgage loan secured by a lien on property of the debtor may be modified
under certain circumstances. For example, the outstanding amount of the loan
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
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to a confirmed plan or lien avoidance proceeding, thus leaving the lender a
general unsecured creditor for the difference between such value and the
outstanding balance of the loan. Other modifications may include the reduction
in the amount of each scheduled payment, by means of a reduction in the rate
of interest and/or an alteration of the repayment schedule (with or without
affecting the unpaid principal balance of the loan), and/or by an extension
(or shortening) of the term to maturity.
Federal bankruptcy law also may have the effect of interfering with or
affecting the ability of the secured lender to enforce the borrower's
assignment of rents and leases related to the mortgaged property. Under
section 362 of the Bankruptcy Code, the lender will be stayed from enforcing
the assignment, and the legal proceedings necessary to resolve the issue could
be time-consuming, with resulting delays in the lender's receipt of the rents.
In addition, 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."
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 owner of such mortgage loan. 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 also may 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.
The Company's acquisition of real property, particularly REO Property, may
be affected by many of the considerations applicable to mortgage loan lending.
For example, the Company's acquisition of certain property at foreclosure sale
could be affected by a borrower's post-sale right of redemption. In addition,
the Company's ability to derive income from real property will generally be
dependent on its receipt of rent payments under leases of the related
property. The ability to collect rents may be impaired by the commencement of
a bankruptcy proceeding relating to a lessee under such lease. Under the
Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a
lessee results in a stay in bankruptcy against the commencement or
continuation of any state court proceeding for past due rent, for accelerated
rent, for damages or for a summary eviction order with respect to a default
under the lease that occurred prior to the filing of the lessee's petition. In
addition, the Bankruptcy Code generally provides that a trustee or debtor-in-
possession may, subject to approval of the court, (i) assume the lease and
retain it or assign it to a third party or (ii) reject the lease. If the lease
is assumed, the 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, 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. The Bankruptcy Code also limits a lessor's damages for lease
rejection to the rent reserved by the lease (without regard to acceleration)
for the greater of one year, or 15%, not to exceed three years, of the
remaining term of the lease.
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 Act ("RICO") can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures
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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.
ENVIRONMENTAL RISKS
GENERAL. The Company will be subject to environmental risks when taking a
security interest in real property, as well as when it acquires any real
property. Of particular concern may be properties that are or have been used
for industrial, manufacturing, military or disposal activity. Such
environmental risks include the risk of the diminution of the value of a
contaminated property or, as discussed below, liability for the costs of
compliance with environmental regulatory requirements or the costs of clean-up
or other remedial actions. These compliance or clean-up costs could exceed the
value of the property or the amount of the lender's loan. In certain
circumstances, a lender could determine to abandon a contaminated mortgaged
property as collateral for its loan rather than foreclose and risk liability
for compliance or clean-up costs.
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for
the costs of clean-up. A secured lender may be liable as an "owner" or
"operator" of a contaminated mortgaged property if agents or employees of the
lender have become sufficiently involved in the management of such mortgaged
property or the operations of the borrower. Such liability may exist even if
the lender did not cause or contribute to the contamination and regardless of
whether the lender has actually taken possession of a mortgaged property
through foreclosure, deed in lieu of foreclosure or otherwise. The magnitude
of the CERCLA liability at any given contaminated site is a function of the
actions required to address adequately the risks to human health and the
environment posed by the particular conditions at the site. As a result, such
liability is not constrained by the value of the property or the amount of the
original or unamortized principal balance of any loans secured by the
property. Moreover, under certain circumstances, liability under CERCLA may be
joint and several--i.e., any liable party may be obligated to pay the entire
cleanup costs regardless of its relative contribution to the contamination.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "1996 Lender Liability Act") provides for a safe harbor for secured
lenders from CERCLA liability even though the lender forecloses and sells the
real estate securing the loan, provided the secured lender sells "at the
earliest practicable, commercially reasonable time, at commercially reasonable
terms, taking into account market conditions and legal and regulatory
requirements." Although the 1996 Lender Liability Act provides significant
protection to secured lenders, it has not been construed by the courts and
there are circumstances in which actions taken could expose a secured lender
to CERCLA liability. And, the transferee from the secured lender is not
entitled to the protections enjoyed by a secured lender. Hence, the
marketability of any contaminated real estate continues to be suspect.
CERTAIN OTHER FEDERAL AND STATE LAWS. Many states have environmental clean-
up statutes similar to CERCLA, and not all those statutes provide for a
secured creditor exemption. In addition, underground storage tanks are
commonly found on a wide variety of commercial and industrial properties.
Federal and state laws impose liability on the owners and operators of
underground storage tanks for any cleanup that may be required as a result of
releases from such tanks. These laws also impose certain compliance
obligations on the tank owners and operators, such as regular monitoring for
leaks and upgrading of older tanks. The Company may become a tank owner or
operator and subject to compliance obligations and potential cleanup
liabilities, either as a result of becoming involved in the management of a
site at which a tank is located or, more commonly, by taking title
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to such a property. Federal and state laws also obligate property owners and
operators to maintain and, under some circumstances, to remove asbestos-
containing building materials and lead-based paint. As a result, the presence
of these materials can increase the cost of operating a property and thus
diminish its value. In a few states, transfers of some types of properties are
conditioned upon cleanup of contamination prior to transfer. In these cases, a
lender that becomes the owner of a property through foreclosure, deed in lieu
of foreclosure or otherwise, may be required to clean up the contamination
before selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law causes
of action (for example, actions based on nuisance or on toxic tort resulting
in death, personal injury or damage to property) related to hazardous
environmental conditions on a property.
SUPERLIEN LAWS. Under the laws of many states, contamination of a property
may give rise to a lien on the property for clean-up costs. In several states,
such a lien has priority over all existing liens, including those of existing
mortgages. In these states, the lien of a mortgage may lose its priority to
such a "superlien."
ADDITIONAL CONSIDERATIONS. The cost of remediating environmental
contamination at a property can be substantial. To reduce the likelihood of
exposure to such losses, the Company will not acquire title to a Mortgaged
Property or take over its operation unless, based on an environmental site
assessment prepared by a qualified environmental consultant, it has made the
determination that it is appropriate to do so. The Company expects that it
will organize a special purpose subsidiary to acquire any environmentally
contaminated real property.
ENVIRONMENTAL SITE ASSESSMENTS. In addition to possibly allowing a lender to
qualify for the innocent landowner defense (See "--CERCLA"), environmental
site assessments can be a valuable tool in anticipating, managing and
minimizing environmental risk. They are commonly performed in many commercial
real estate transactions.
Environmental site assessments vary considerably in their content and
quality. Even when adhering to good professional practices, environmental
consultants will sometimes not detect significant environmental problems
because an exhaustive environmental assessment would be far too costly and
time-consuming to be practical. Nevertheless, it is generally helpful in
assessing and addressing environmental risks in connection with commercial
real estate (including multifamily properties) to have an environmental site
assessment of a property because it enables anticipation of environmental
problems and, if agreements are structured appropriately, can allow a party to
decline to go forward with a transaction.
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 that are
structural in nature from existing places of public accommodation to the
extent "readily achievable." In addition, under the ADA, alterations to a
place of public accommodation or a commercial facility are to be made so that,
to the maximum extent feasible, 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.
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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 is 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. Because the
Relief Act applies to mortgagors who enter military service after origination
of the related mortgage loan, no information can be provided as to the number
of Mortgage Loans that may be affected by the Relief Act. 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
Mortgage Loans. In addition, the Relief Act imposes limitations that would
impair the ability of a servicer to foreclosure 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.
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USE OF PROCEEDS
Upon completion of this Offering, the Company will use approximately $206
million plus accrued interest to purchase the Initial Investments. The
purchase price for the Initial Investments was based on certain assumptions
made with respect to the potential net cash flows to be generated by the
Initial Investments. See "Initial Investments," "Yield Considerations
Regarding the Company's Investments" and "Risk Factors--Other Risks--Conflicts
of Interest in the Business of the Company." Pending investment, the balance
of the net proceeds (approximately $[ ] million) will be invested
temporarily in short-term, readily marketable interest-bearing securities and
held by the Company until used to acquire Real Estate Related Assets as
provided herein. See "Operating Policies and Objectives."
The Company intends to supplement the proceeds of this Offering through
securitization and collateralization of its portfolios of Mortgage Loans. The
Company's strategy is to sell the senior classes, retaining the subordinated
interests therein for its portfolio. The Company intends to pledge certain of
its assets, including its Mortgage Loans and MBS Interests, as collateral for
the purchase of additional Mortgage Loans and MBS Interests. The Company
intends to leverage its portfolio through borrowings, generally through the
use of loans secured by both Mortgage Loans and MBS Interests in the Company's
portfolio, reverse repurchase agreements, bank credit facilities, warehouse
lines of credit on pools of Real Property and Mortgage Loans, Mortgage Loans
on Real Property, and other borrowings. The Company also may issue debt
securities and additional equity securities.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell to each of the Underwriters named below (the
"Underwriters"), and each of the Underwriters, including those for whom
Friedman, Billings, Ramsey & Co., Inc. and Jefferies & Company, Inc. are
acting as representatives (the "Representatives"), has severally agreed to
purchase from the Company, the number of shares of Common Stock offered hereby
and set forth below opposite its name.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc....................
Jefferies & Company, Inc.................................
----------
Total.................................................. 20,000,000
==========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to purchase all the shares of Common Stock offered
hereby if any are purchased.
The Underwriters propose initially to offer the shares of Common Stock
directly to the public at the public offering price set forth on the cover
page of this Prospectus and to certain dealers at such offering price less a
concession not to exceed $ per share of Common Stock. The Underwriters may
allow and such dealers may reallow a concession not to exceed $ per share
of Common Stock to certain other dealers. After the shares of Common Stock are
released for sale to the public, the public offering price and other selling
terms may be changed by the Underwriters.
At the request of the Company, the Underwriters have reserved 1,980,000
shares for sale to Imperial Credit at the initial public offering price set
forth on the cover page of this Prospectus net of any underwriting discounts
or commissions, up to 200,000 shares of Common Stock (230,000 shares if the
Underwriters' over-allotment option is exercised in full) for sale to
directors, officers and employees of either the Company or the Manager and
members of their respective immediate families at the initial public offering
price net of any underwriting discounts or commissions, and up to 200,000
shares of Common Stock (245,000 shares if the Underwriters' over-allotment
option is exercised in full) for sale to certain persons at the initial public
offering price. The number of shares of Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not so purchased will be
offered by the Underwriters to the general public on the same basis as the
other shares offered hereby. Imperial Credit has advised the Company that it
intends to purchase the shares reserved for sale to it.
The Company has granted to the Underwriters an option exercisable during the
30-day period beginning with the date hereof to purchase, at the initial
public offering price less underwriting discounts and commissions, up to an
additional 3,000,000 shares of Common Stock for the sole purpose of covering
over-allotments, if any. To the extent that the Underwriters exercise such
option, each Underwriter will be committed, subject to certain conditions, to
purchase a number of the additional shares of Common Stock proportionate to
such Underwriter's initial commitment.
The Company has agreed to indemnify the several Underwriters against certain
civil liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price has been determined by negotiation
between the Company and the Representatives. Among the factors considered in
making such determination were the history of, and the prospects for, the
industry in which the Company will compete, an assessment of the skills of the
Manager and the Company's prospects for future earnings, the general
conditions of the economy and the securities market and the prices of
offerings by similar issuers. There can, however, be no assurance that the
price at which the shares of Common Stock will sell in the public market after
this Offering will not be lower than the price at which they are sold by the
Underwriters.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of the shares offered hereby to any accounts over
which they exercise discretionary authority.
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Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for or purchase the Common Stock. As an exception to these
rules, the Representatives are permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price
of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described above.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold such shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
The Company and its directors and executive officers have agreed not to
offer, sell or contract to sell or otherwise dispose of any Common Stock
without the prior consent of Friedman Billings, Ramsey & Co., Inc. for a
period of 120 days from the date of this Prospectus.
Imperial Credit has agreed not to offer, sell or contract to sell or
otherwise dispose of the Common Stock purchased by it pursuant to the
reservation described above without the prior consent of the Representatives
for a period of two years from the date of Closing, provided that the Manager
continues to serve as manager of the Company during such period.
The Company will apply for inclusion of the Common Stock in the Nasdaq
National Market under the symbol "ICMI." The Representatives have advised the
Company that they intend to make a market in the Common Stock upon completion
of this Offering. The Representatives will have no obligation to make a market
in the Common Stock, however, and may cease market making activities, if
commenced, at any time.
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LEGAL MATTERS
The validity of the Common Stock offered in the Offering will be passed upon
for the Company by Sonnenschein Nath & Rosenthal, Los Angeles, California, and
for the Underwriters by Hunton & Williams, Richmond, Virginia. Sonnenschein
Nath & Rosenthal will be relying as to matters of Maryland law on the opinion
of Piper & Marbury L.L.P. Cadwalader, Wickersham & Taft will provide certain
legal services on behalf of the Company in connection with the Offering.
EXPERTS
The balance sheet of Imperial Credit Commercial Mortgage Investment Corp. as
of July 31, 1997 has been included in this Prospectus and in the Registration
Statement in reliance upon the report of KMPG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
THE COMPANY
The Company 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 Common Stock
offered pursuant to the Prospectus. This Prospectus contains summaries of the
material terms of the documents referred to herein and therein, but does 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 as well as reports and other
information filed by ICCMIC can be inspected without charge and copied at
prescribed rates at the public reference facilities maintained by the
Commission at the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its Regional Offices located as
follows: Chicago Regional Office, Citicorp Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661-2511; and New York Regional Office,
Seven World Trade Center, Suite 1300, New York, New York 10048. The Commission
maintains a Web site that contains reports, proxy, and information statements
and other information regarding registrants that file electronically with the
Commission. The Web site is located at http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any contract
or other document that is filed as an exhibit to the Registration Statement
are not necessarily complete, and each such statement is qualified in its
entirety by reference to the full text of such contract or document.
The Company will be required to file reports and other information with the
Commission pursuant to the Securities Exchange Act of 1934. In addition to
applicable legal requirements, if any, holders of Common Stock will receive
annual reports containing audited financial statements with a report thereon
by the Company's independent certified public accountants, and quarterly
reports containing unaudited financial information for each of the first three
quarters of each fiscal year.
IMPERIAL CREDIT
Imperial Credit files reports and other information with the Commission
pursuant to the Securities Exchange Act of 1934. Additional information about
Imperial Credit, therefore, may be inspected or copied at the public reference
facilities maintained by the Commission at the locations mentioned above.
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GLOSSARY OF TERMS
Except as otherwise specified or as the context may otherwise require, the
following terms used herein shall have the meanings assigned to them below.
All terms in the singular shall have the same meanings when used in the plural
and vice-versa.
"1996 Lender Liability Act" shall mean the Asset Conservation, Lender
Liability and Deposit Insurance Act of 1996.
"ADA" shall mean the Americans with Disabilities Act of 1990, as amended.
"Affiliate" shall mean (i) any person directly or indirectly owning,
controlling, or holding, with power to vote ten percent or more of the
outstanding voting securities of such other person, (ii) any person ten
percent or more of whose outstanding voting securities are directly or
indirectly owned, controlled, or held, with power to vote, by such other
person, (iii) any person directly or indirectly controlling, controlled by, or
under common control with such other person, (iv) any executive officer,
director, trustee or general partner of such other person, and (v) any legal
entity for which such person acts as an executive officer, director, trustee
or general partner. The term "person" means and includes any natural person,
corporation, partnership, association, limited liability company or any other
legal entity. An indirect relationship shall include circumstances in which a
person's spouse, children, parents, siblings or mothers-, fathers-, sisters-
or brothers-in-law is or has been associated with a person.
"Average Invested Assets" shall mean the average of the aggregate book value
of the assets of the Company (including all of ICCMIC's direct and indirect
subsidiaries), before reserves for depreciation or bad debts or other similar
noncash reserves, computed by taking the daily average of such values during
such period.
"Balloon Mortgage Loan" shall mean a Mortgage Loan that is not fully
amortizing over its term to maturity and requires a substantial principal
payment at stated maturity.
"Bankruptcy Code" shall mean Title 11 of the United States Code, as amended.
"Beneficiary" shall mean the beneficiary of the Trust.
"Board of Directors" shall mean the Board of Directors of the Company.
"Bylaws" shall mean the Bylaws of the Company.
"CERCLA" shall mean the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"Charter" shall mean the corporate charter of ICCMIC and amendments thereto,
as filed pursuant to MGCL.
"Closing" shall mean the closing of the Offering.
"Closing Date" shall mean on or about [ ], 1997.
"Closing Price" shall mean the average of the high bid and low asked prices
in the over-the-counter market, as reported by The Nasdaq Stock Market.
"CMBS" shall mean commercial or multifamily MBS.
"CMO or CMO Bonds" shall mean collateralized mortgage obligations.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall mean the Securities and Exchange Commission.
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"Common Stock" shall mean the Common Stock, par value $0.0001 per share, of
ICCMIC.
"Company" shall mean Imperial Credit Mortgage Investment Corp., a Maryland
corporation, together with its subsidiaries, unless the context indicates
otherwise.
"Company Expenses" shall mean all administrative costs and expenses of the
Company and the General Partner.
"Construction Loan" shall mean a loan the proceeds of which are to be used
to finance the costs of construction or rehabilitation of Real Property.
"Control Share Acquisition" shall mean the acquisition of control shares,
subject to certain exceptions.
"Control shares" shall mean voting shares of stock which, if aggregated with
all other such shares of stock previously acquired by the acquirer or in
respect of which the acquirer is able to exercise or direct the exercise of
voting power (except solely by virtue of a revocable proxy), would entitle the
acquirer to exercise voting power in electing directors within one of the
following ranges of voting power: (1) one-fifth or more but less than one-
third, (2) one-third or more but less than a majority, or (3) a majority or
more of all voting power; but "control shares" shall not include shares the
acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval.
"Crime Control Act" shall mean the Comprehensive Crime Control Act of 1984.
"Cut-Off Date" means June 25, 1997.
"Directors" means the members of the Company's Board of Directors.
"Distressed Mortgage Loans" shall mean Subperforming Mortgage Loans and
Nonperforming Mortgage Loans.
"Distressed Real Properties" shall mean REO Properties and other
underperforming or otherwise distressed real property.
"DRI" shall mean Dabney/Resnick/Imperial, LLC.
"DOL" shall mean the Department of Labor.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Inclusion" shall have the meaning specified in section 860E(c) of
the Code.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exempt Organizations" shall mean tax-exempt entities, including, but not
limited to, charitable organizations, qualified employee pension and profit
sharing trusts and individual retirement accounts.
"FHLB" shall mean the Federal Home Loan Bank.
"FIRPTA" shall mean the Foreign Investment in Real Property Tax Act of 1980.
"FLHMC" shall mean the Federal Loan Home Mortgage Corporation, a corporate
instrumentality of the United States created and existing under Title III of
the Emergency Home Finance Act of 1970, as amended, or any successor thereto.
"FMAC" shall mean Franchise Mortgage Acceptance Company, LLC.
120
<PAGE>
"FNMA" shall mean the Federal National Mortgage Association, a federally
chartered and privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act, or any successor thereto.
"Formation Transactions" shall mean transactions relating to the formation
of the Company.
"Funds From Operations" shall mean net income (computed in accordance with
GAAP), excluding gains (or losses) from debt restructuring or sales of
property, plus depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures.
"GAAP" shall mean generally accepted accounting principles applied on a
consistent basis.
"Guidelines" shall mean guidelines that set forth general parameters for the
Company's investments, borrowings and operations.
"HUD" shall mean the Department of Housing and Urban Development.
"IBC" shall mean Imperial Business Credit, Inc.
"ICCMIC" shall mean Imperial Credit Mortgage Investment Corp.
"ICMSC" shall mean Imperial Credit Mortgage Securitization Corp.
"Imperial Credit" shall mean Imperial Credit Industries, Inc.
"Independent Director" shall mean a director who, (a) does not own greater
than a dc minimus interest in the Manager or any of its Affiliates, (b) within
the last two years, has not (i) been employed by the Manager or any of its
Affiliates, (ii) been an officer or director of the Manager or any of its
Affiliates, (iii) performed services for the Manager or any of its Affiliates,
(iv) had any material business or professional relationship with the Manager
or any of its Affiliates.
"Initial Investments" shall mean the Mortgage Loans and MBS Interests, which
are to be acquired immediately following the Closing.
"Interested Stockholder" shall mean any person who beneficially owns 10% or
more of the voting power of a corporation's shares or an affiliate of a
corporation who, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10% or more of the voting power of the
then outstanding voting stock of a corporation.
"Inverse IO" shall mean a class of MBS that is entitled to no (or only
nominal) distributions of principal, but is entitled to interest at a floating
rate that varies inversely with a specified index.
"Investment Company Act" shall mean the Investment Company Act of 1940, as
amended.
"IO" shall mean a class of MBS that is entitled to no (or only nominal)
distributions of principal.
"IRA" shall mean an individual retirement account.
"Lease" shall mean, with respect to each Mortgaged Property or Real
Property, the agreement pursuant to which the borrower rents and leases to the
lessee and the lessee rents and leases from the borrower, such Mortgaged
Property or Real Property.
"LIBOR" shall mean the London Interbank Offering Rate for one-month U.S.
Dollar deposits.
"Management Agreement" shall mean an agreement or agreements between the
Company and the Manager pursuant to which the Manager performs various
services for the Company.
121
<PAGE>
"Manager" shall mean Imperial Credit Asset Management Corporation.
"Market Price" shall mean the average of the Closing Price for the five
consecutive Trading Days ending on such date.
"MBS" shall mean mortgage-backed securities (including RMBS and CMBS).
"MBS Interests" shall mean interests in RMBS and CMBS.
"Mezzanine Loan" shall mean a loan secured by a lien on Real Property that
is subordinate to a lien on such Real Property securing another loan.
"MGCL" shall mean the Maryland General Corporation Law.
"Mortgage Collateral" shall mean mortgage pass-through securities or pools
of whole loans securing or backing a series of MBS.
"Mortgage Loan" shall mean a mortgage loan held by the Company or a mortgage
loan underlying a series of MBS, as the context indicates.
"Mortgaged Property" shall mean the real property securing a Mortgage Loan.
"NAREIT" shall mean the National Association of Real Estate Investment
Trusts, Inc.
"Net Income" shall mean the income of the Company as reported for federal
income tax purposes before the Manager's incentive compensation, net operating
loss deductions arising from losses in prior periods and the deduction for
dividends paid, plus the effects of adjustments, if any, necessary to record
hedging and interest transactions in accordance with generally accepted
accounting principles.
"Non-ERISA Plan" shall mean a plan that does not cover common law employees.
"Non Real Estate Assets" shall mean real or personal property or interests
therein acquired by the Company that are other than Real Estate Related
Interests.
"Nonperforming Mortgage Loans" shall mean multifamily and commercial
mortgage loans for which the payment of principal and interest is more than 90
days delinquent.
"Offering" shall mean the offering of Common Stock hereby.
"Offering Price" shall mean the offering price of $16 per Common Share
offered hereby.
"OID" shall mean original issue discount.
"Operating Partnership Agreement" shall mean the partnership agreement of
the Operating Partnership (if it is formed), as amended from time to time.
"Option Plan" shall mean a plan which provides for options to purchase
Common Stock of the Company.
"Other Mortgage Loan" shall mean a Mortage Loan that is a Construction Loan,
a Mezzanine Loan or a Distressed Mortgage Loan.
"Other Real Estate Related Assets" shall mean real estate related assets
other than Mortgage Loans and MBS Interests.
"OTS" shall mean the Office of Thrift Supervision.
122
<PAGE>
"Ownership Limitation" shall mean the restriction on ownership (or deemed
ownership by virtue of the attribution provisions of the Code) of (a) more
than 9.9% of the outstanding shares of Common Stock by any stockholder, or (b)
more than 9.9% of the shares of any series of Preferred Stock by any
stockholder.
"Pass-Through Certificates" shall mean interests in trusts, the assets of
which are primarily mortgage loans.
"Plan" shall mean certain pension, profit-sharing, employee benefit, or
retirement plans or individual retirement accounts.
"Plan Asset Regulations" shall mean regulations of the Department of Labor
that define "plan assets."
"PO" shall mean a class of MBS that is entitled to no distributions of
interest.
"Preferred Stock" shall mean the preferred stock of the Company.
"Prohibited Owner" shall mean the record holder of the shares of Common
Stock or Preferred Stock that are designated as Shares-in-Trust.
"Qualifying Interests" shall mean mortgages and other liens on and interests
in real estate.
"Real Estate Related Assets" shall mean Mortgage Loans, MBS Interests, and
Other Real Estate Related Assets.
"Real Property" shall mean multifamily, commercial and other real property.
"Realized Losses" shall mean, generally, the aggregate amount of losses
realized on loans that are liquidated and losses on loans due to fraud,
mortgagor bankruptcy or casualty.
"REIT" shall mean real estate investment trust, as defined in section 856 of
the Code.
"Related Party Tenant" shall mean a tenant of ICCMIC or, if it is formed,
the Operating Partnership in which ICCMIC owns 10% or more of the ownership
interests, taking into account both direct ownership and constructive
ownership.
"REMIC" shall mean real estate mortgage investment conduit, as defined in
section 860D of the Code.
"REMIC Residual Interest" shall mean a class of MBS that is designated as
the residual interest in one or more REMICs.
"Rent" shall mean rent received by the Company from tenants of Real Property
owned by the Company.
"REO Property" shall mean real property acquired at foreclosure (or by deed
in lieu of foreclosure).
"RICO" shall mean the Racketeer Influenced and Corrupt Organizations Act, 18
U.S.C.A. (S) 1961, et seq.
"RMBS" shall mean a series of one- to four-family residential MBS.
"Rule 144" shall mean the rule promulgated under the Securities Act that
permits holders of restricted securities as well as affiliates of an issuer of
the securities, pursuant to certain conditions and subject to certain
restrictions, to sell their securities publicly without registration under the
Securities Act.
"SAIF" shall mean the Savings Association Insurance Fund.
"Securities Act" shall mean the Securities Act of 1933, as amended.
123
<PAGE>
"Service" shall mean the Internal Revenue Service.
"Shares-in-Trust" shall mean shares of Common Stock or Preferred Stock the
purported transfer of which would result in a violation of the Ownership
Limitation, result in the stock of ICCMIC being held by fewer than 100
persons, result in ICCMIC being "closely held," or cause ICCMIC to own 10% or
more of the ownership interests in a tenant of the Company's Real Property.
"SPTL" shall mean Southern Pacific Thrift & Loan Association.
"Special Servicing" shall mean servicing of defaulted mortgage loans,
including oversight and management of the resolution of such mortgage loans by
modification, foreclosure, deed in lieu of foreclosure or otherwise.
"Sub IO" shall mean an IO with characteristics of a subordinated MBS
Interest.
"Subperforming Mortgage Loans" shall mean multifamily and commercial
mortgage loans for which default is likely or imminent.
"Ten-Year U.S. Treasury Rate" shall mean the arithmetic average of the
weekly average yield to maturity for actively traded current coupon U.S.
Treasury fixed interest rate securities (adjusted to constant maturities of
ten years) published by the Federal Reserve Board during a quarter, or, if
such rate is not published by the Federal Reserve Board, any Federal Reserve
Bank or agency or department of the federal government selected by the
Company.
"Term Loans" shall mean multifamily and commercial term mortgage loans.
"Title V" shall mean Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980.
"Trading Day" shall mean any day other than a Saturday, a Sunday or a day on
which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Treasury Regulations" shall mean the income tax regulations promulgated
under the Code.
"Trust" shall mean a trust created in the event of an impermissible transfer
of shares of Common Stock.
"Trustee" shall mean a trustee of the Trust.
"UBTI" shall mean unrelated business taxable income.
"UBTI Percentage" shall mean the gross income derived by the Company from an
unrelated trade or business divided by the gross income of the Company for the
year in which the dividends are paid.
"UCC" shall mean the Uniform Commercial Code.
"Underwriters" shall mean Friedman, Billings, Ramsey & Co., Inc. and
Jefferies & Company, Inc. and each of the underwriters for whom Friedman,
Billings, Ramsey & Co., Inc. and Jefferies & Company, Inc. are acting as
representatives.
"Underwriting Agreement" shall mean the agreement pursuant to which the
Underwriters will underwrite the Common Stock.
"Units" shall mean units of limited partnership interest in the Operating
Partnership, if it is formed.
124
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
Imperial Credit Commercial Mortgage Investment Corp.:
We have audited the accompanying balance sheet of Imperial Credit Mortgage
Investment Corp. (the "Company") as of July 31, 1997. This balance sheet is
the responsibility of the Company's management. Our responsibility is to
express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Imperial Credit Mortgage
Investment Corp. as of July 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
July 31, 1997
F-1
<PAGE>
IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
BALANCE SHEET
JULY 31, 1997
<TABLE>
<S> <C>
Cash.................................................................... $1,500
------
Total assets.......................................................... $1,500
======
Stockholders' equity:
Common stock, $0.001 par value. Authorized 500,000,000 shares, 100
shares issued and outstanding........................................ --
Paid-in capital....................................................... 1,500
------
Total stockholders' equity.......................................... $1,500
======
</TABLE>
See accompanying notes to balance sheet.
F-2
<PAGE>
IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
NOTES TO BALANCE SHEET
JULY 31, 1997
NOTE 1--ORGANIZATION
Imperial Credit Commercial Mortgage Investment Corp. (the "Company") was
incorporated in Maryland on July 31, 1997 and was initially capitalized on
such date through the sale of 100 shares of Common Stock for $1,500. The
Company will seek to acquire multifamily and commercial Mortgage Loans and MBS
interests and other Real Property.
The Company's sole activity through July 31, 1997, consisted of the
organization and start-up of the Company. Accordingly, no statement of
operations is presented.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income Taxes
The Company will elect to be taxed as a real estate investment trust under
the Internal Revenue Code. As a result, the Company will not be subject to
federal income taxation at the corporate level to the extent it distributes
annually its predistribution taxable income of at least 95% of its real estate
investment trust taxable income so distributable.
Income Recognition
Income and expenses are to be recorded on the accrual basis of accounting.
NOTE 3--TRANSACTIONS WITH AFFILIATES
The Company intends to enter into a Management Agreement (the "Management
Agreement") with Imperial Credit Asset Management Corporation (the "Manager"),
a wholly-owned subsidiary of Imperial Credit, under which the Manager will
advise the Company on various facets of its business and manage its day-to-day
operations, subject to the supervision of the Company's Board of Directors.
The Manager will receive a base management fee of 1% per annum of Average
Invested Assets, payable quarterly, and a quarterly incentive fee in an amount
equal to (A) 25% of the dollar amount by which (1)(a) Funds from Operations
(before the incentive fee) of Company per share of Common Stock (based on the
weighted average number of shares outstanding) plus (b) gains (or minus
losses) from debt restructuring and sales of property per share of Common
Stock (based on the weighted average number of shares outstanding), exceed (2)
an amount equal to (a) the weighted average of the price per share at the
initial public offering and the prices per share at any secondary offerings by
the Company multiplied by (b) the Ten-Year U.S. Treasury Rate plus five
percent per annum multiplied by (B) the weighted average number of shares of
Common Stock outstanding during such quarter.
The Company intends to adopt a non-qualified stock option plan to provide a
means of incentive compensation for the Manager, whereby the Manager will be
granted an option to purchase shares of Common Stock in the Company (or, at
the Company's election, Units in Imperial Credit, in an amount equal to 10% of
the shares outstanding following the Company's initial public offering,
exercisable at the initial public offering price. One third of the Manager's
options will be exercisable on each of the first three anniversaries of the
Closing Date of the initial public offering.
The Company further intends to issue Common Stock to Imperial Credit,
concurrent with the closing of the initial public offering, at the initial
public offering price net of any underwriting discounts and commissions.
Moreover, with a substantial portion of the net proceeds of the initial public
offering, the Company intends to purchase Mortgage Loans and MBS Interests
from Southern Pacific Thrift & Loan Association ("SPTL"), a wholly-owned
subsidiary of Imperial Credit.
NOTE 4--PUBLIC OFFERING OF COMMON STOCK
The Company is in the process of filing a Registration Statement for sale of
up to 23,000,000 shares of Common Stock. Contingent upon the consummation of
the public offering, the Company will be liable for organization and offering
expenses in connection with the sale of the shares of Common Stock offered.
F-3
<PAGE>
ANNEX A
MORTGAGE LOAN CHARACTERISTICS
The following tables show certain characteristics of the Initial Annex A
Mortgage Loans as of the Cut-off Date. The totals may not add up to 100% due to
rounding.
MORTGAGE INTEREST RATES(1)
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE PERCENT BY
NUMBER PRINCIPAL AGGREGATE
NUMBER OF OF BALANCE AS OF PRINCIPAL
MORTGAGE MORTGAGE MORTGAGE THE CUT- BALANCE AS OF
INTEREST RATES LOANS LOANS OFF DATE THE CUT-OFF DATE
-------------- --------- ---------- ------------- ----------------
<S> <C> <C> <C> <C>
7.0001%--7.5000%........... 78 18.01% $ 34,548,522 25.33%
7.5001 -- 8.0000........... 136 31.41 46,571,725 34,15
8.0001 -- 8.5000........... 27 6.24 9,741,316 7.14
8.5001 -- 9.0000........... 38 8.78 7,494,349 5.50
9.0001 -- 9.5000........... 27 6.24 5,124,593 3.76
9.5001 --10.0000........... 19 4.39 6,221,831 4.56
10.0001 --10.5000........... 15 3.46 7,233,074 5.30
10.5001 --11.0000........... 11 2.54 3,822,085 2.80
11.0001 --11.5000........... 5 1.15 1,227,653 0.90
11.5001 --12.0000........... 23 5.31 5,984,555 4.39
12.0001 --12.5000........... 18 4.16 4,881,802 3.58
12.5001 --13.0000........... 18 4.16 1,845,239 1.35
13.0001 --13.5000........... 5 1.15 384,277 0.28
13.5001 --14.0000........... 7 1.62 771,639 0.57
14.0001 --14.5000........... 2 0.46 172,599 0.13
15.0001 --15.5000........... 2 0.46 44,956 0.03
15.5001 --16.0000........... 1 0.23 291,523 0.21
16.0001 --16.5000 1 0.23 11,296 0.01
--- ------ ------------ ------
TOTAL 433 100.00% $136,373,032 100.00%
=== ====== ============ ======
</TABLE>
Weighted Average Mortgage Interest Rate: 8.705%
- --------
(1) 87.64% of the Mortgage Loans are adjustable rate mortgage loans (the "ARM
Loans").
INTEREST RATE TYPE
<TABLE>
<CAPTION>
MULTI-
FAMILY % OF % OF % OF
LOAN TYPE BALANCE PORTFOLIO COMMERCIAL PORTFOLIO ALL BALANCE PORTFOLIO
- --------- ----------- --------- ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
ARM..................... $75,484,790 86.38% $42,368,309 86.50% $117,853,100 86.42%
Negative Amortization
ARM.................... 1,665,362 1.91 -- 0.00 1,665,362 1.22
Fixed Rate.............. 10,239,437 11.72 6,615,134 13.50 16,854,570 12.36
----------- ------ ----------- ------ ------------ ------
Total Portfolio....... $87,389,589 100.00% $48,983,443 100.00% $136,373,032 100.00%
=========== ====== =========== ====== ============ ======
</TABLE>
A-1
<PAGE>
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE PERCENT BY
NUMBER PRINCIPAL AGGREGATE
PRINCIPAL NUMBER OF OF BALANCE AS OF PRINCIPAL
BALANCE AS OF MORTGAGE MORTGAGE THE CUT- BALANCE AS OF
THE CUT-OFF DATE LOANS LOANS OFF DATE THE CUT-OFF DATE
---------------- --------- ---------- ------------- ----------------
<S> <C> <C> <C> <C>
$0.01--$ 100,000.... 60 13.86% $ 3,418,519 2.51%
100,000.01-- 200,000... 179 41.34 26,520,687 19.45
200,000.01-- 300,000... 78 18.01 19,170,169 14.06
300,000.01-- 400,000... 26 6.00 9,177,580 6.73
400,000.01-- 500,000... 24 5.54 10,764,517 7.89
500,000.01-- 600,000... 10 2.31 5,809,638 4.26
600,000.01-- 700,000... 15 3.46 10,039,742 7.36
700,000.01-- 800,000... 8 1.85 6,069,921 4.45
800,000.01-- 900,000... 7 1.62 5,993,858 4.40
900,000.01-- 1,000,000... 7 1.62 6,669,784 4.89
1,000,000.01-- 1,100,000... 2 0.46 2,147,881 1.58
1,100,000.01-- 1,200,000... 0 0.00 - 0.00
1,200,000.01-- 1,300,000... 1 0.23 1,233,955 0.90
1,300,000.01-- 1,400,000... 2 0.46 2,721,442 2.00
1,400,000.01-- 1,500,000... 4 0.92 5,923,994 4.34
1,500,000.01-- 1,600,000... 2 0.46 3,132,179 2.30
1,600,000.01-- 1,700,000... 2 0.46 3,352,338 2.46
1,700,000.01-- 1,800,000... 0 0.00 - 0.00
1,800,000.01-- 1,900,000... 1 0.23 1,823,486 1.34
1,900,000.01-- 2,000,000... 1 0.23 1,990,319 1.46
2,000,000.01-- 2,100,000... 0 0.00 - 0.00
2,100,000.01-- 2,200,000... 1 0.23 2,150,000 1.58
2,200,000.01-- 2,300,000... 0 0.00 - 0.00
2,300,000.01-- 2,400,000... 1 0.23 2,350,000 1.72
2,400,000.01-- 2,500,000... 0 0.00 - 0.00
2,500,000.01-- 2,600,000... 0 0.00 - 0.00
2,600,000.01-- 2,700,000... 0 0.00 - 0.00
2,700,000.01-- 2,800,000... 0 0.00 - 0.00
2,800,000.01-- 2,900,000... 0 0.00 - 0.00
2,900,000.01-- 3,000,000... 2 0.46 5,913,024 4.34
--- ------ ------------ ------
Total:..................... 433 100.00% $136,373,032 100.00%
=== ====== ============ ======
</TABLE>
Average Principal Balance: $314,949
A-2
<PAGE>
INDICES
<TABLE>
<CAPTION>
PERCENT BY
PERCENT BY AGGREGATE AGGREGATE
NUMBER PRINCIPAL PRINCIPAL
NUMBER OF OF BALANCE AS OF BALANCE AS OF
MORTGAGE MORTGAGE THE CUT- THE CUT-
INDEX LOANS LOANS OFF DATE OFF DATE
----- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Six-Month LIBOR............... 209 48.27% $ 80,094,833 58.73%
Prime......................... 79 18.24 18,429,711 13.51
Sixth-Month U.S. Treasury..... 19 4.39 3,810,636 2.79
One-Year U.S. Treasury........ 26 6.00 15,308,643 11.23
Fixed......................... 89 20.55 16,854,570 12.36
Other ........................ 11 2.54 1,874,638 1.37
--- ------ ------------ ------
Total:........................ 433 100.00% $136,373,032 100.00%
=== ====== ============ ======
</TABLE>
NOTE MARGINS
FOR ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
PERCENT BY AGGREGATE
NUMBER AGGREGATE PRINCIPAL
NUMBER OF OF PRINCIPAL BALANCE AS OF
MORTGAGE MORTGAGE BALANCE AS OF THE CUT-
NOTE MARGIN LOANS LOANS THE CUT-OFF DATE OFF DATE
----------- --------- ---------- ---------------- -------------
<S> <C> <C> <C> <C>
0.0000-2.0000............... 3 0.87% $ 442,459 0.37%
2.2500-2.4900............... 3 0.87 475,019 0.40
2.5000-3.0000............... 21 6.10 10,382,654 6.69
3.0000-3.5000............... 42 12.21 14,306,641 11.97
3.5000-4.0000............... 164 47.67 52,883,186 44.25
4.0000-4.5000............... 70 20.35 27,189,302 22.75
4.5000-5.0000............... 31 9.01 11,499,306 9.62
5.0000-5.5000............... 9 2.62 2,291,876 1.92
5.5000-6.0000............... 1 0.29 48,020 0.04
--- ------ ------------ ------
Total:...................... 344 100.00% $119,518,462 100.00%
=== ====== ============ ======
</TABLE>
Weighted Average Note Margin: 3.940%
A-3
<PAGE>
MINIMUM MORTGAGE INTEREST
RATES FOR ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE PERCENT BY
NUMBER PRINCIPAL AGGREGATE
MINIMUM NUMBER OF OF BALANCE AS OF PRINCIPAL
MORTGAGE MORTGAGE MORTGAGE THE CUT- BALANCE AS OF
INTEREST RATE LOANS LOANS OFF DATE THE CUT-OFF DATE
- ------------- --------- ---------- ------------- ----------------
<S> <C> <C> <C> <C>
0-5.0....................... 14 4.07% $ 2,148,267 1.80%
5.0001- 5.500............... 1 0.29 432,144 0.36
5.5001- 6.000............... 0 0.00 -- 0.00
6.0001- 6.500............... 1 0.29 763,221 0.64
6.5001- 7.000............... 3 0.87 757,925 0.63
7.0001- 7.500............... 84 24.42 36,048,575 30.16
7.5001- 8.000............... 126 36.63 46,725,213 39.09
8.0001- 8.500............... 18 5.23 9,282,870 7.77
8.5001- 9.000............... 25 7.27 5,068,941 4.24
9.0001- 9.500............... 14 4.07 3,828,286 3.20
9.5001-10.000............... 4 1.16 1,024,479 0.86
10.001-10.500............... 12 3.49 5,632,235 4.71
10.501-11.000............... 10 2.91 3,689,727 3.09
11.001-11.500............... 4 1.16 976,276 0.82
11.501-12.000............... 10 2.91 1,590,681 1.33
12.001-12.500............... 1 0.29 11,733 0.01
12.501-13.000............... 11 3.20 1,052,596 0.68
13.001-13.500............... 2 0.58 131,190 0.11
13.501-14.000............... 4 1.16 353,902 0.30
--- ----- ------------ -----
Total:...................... 344 100% $119,518,462 100%
=== ===== ============ =====
</TABLE>
Weighted Average Minimum Mortgage Interest Rate: 8.071%
A-4
<PAGE>
MAXIMUM MORTGAGE INTEREST
RATES FOR ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE PERCENT BY
NUMBER PRINCIPAL AGGREGATE
MAXIMUM NUMBER OF OF BALANCE AS OF PRINCIPAL
MORTGAGE MORTGAGE MORTGAGE THE CUT- BALANCE AS OF
INTEREST RATE LOANS LOANS OFF DATE THE CUT-OFF DATE
------------- --------- ---------- ------------- ----------------
<S> <C> <C> <C> <C>
0-
13.00..................... 6 1.74% $ 2,791,291 2.34%
13.001-13.50............... 85 24.71 38,077,288 31.86
13.5001-14.00 ............. 128 37.21 46,570,252 38.96
14.0001-14.50 ............. 21 6.10 8,911,258 7.46
14.5001-15.00.............. 21 6.10 4,106,314 3.44
15.0001-15.500............. 15 4.36 6,213,071 5.20
15.5001-16.000 ............ 10 2.91 1,371,976 1.15
16.0001-16.500............. 16 4.65 3,596,333 3.01
16.5001-17.000............. 9 2.62 3,477,143 2.91
17.0001-17.500............. 6 1.74 1,414,076 1.18
17.5001-18.000............. 11 3.20 1,691,604 1.42
18.0001-18.500............. 1 0.29 11,733 0.01
18.5001-19.000............. 10 2.91 889,654 0.74
19.0001-19.500............. 2 0.58 131,190 0.11
19.5001-20.00.............. 3 0.87 265,280 0.22
--- ------ ------------ ------
Total:..................... 344 100.00% $119,518,462 100.00%
=== ====== ============ ======
</TABLE>
Weighted Average Maximum Mortgage Interest Rate: 14.149%
A-5
<PAGE>
PERIODIC CAP FOR
ALL ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE
PRINCIPAL
PERCENT BY AGGREGATE BALANCE OF
NUMBER PRINCIPAL MORTGAGE LOANS
NUMBER OF OF BALANCE AS OF AS OF
MORTGAGE MORTGAGE THE CUT- THE CUT-
PERIODIC CAP LOANS LOANS OFF DATE OFF DATE
------------ --------- ---------- ------------- --------------
<S> <C> <C> <C> <C>
0.0000-.5.0000................ 4 1.16% $ 605,514 0.51%
0.5001-1.0000................. 9 2.62 1,861,099 1.56
1.0001-1.5000................. 169 49.13 61,570,893 51.52
1.5001-2.0000................. 158 45.93 54,023,088 45.20
3.0000-4.9999................. 1 0.29 29,072 0.02
5.0000-5.5000................. 3 0.87 1,428,796 1.20
--- ------ ------------ ------
Total:........................ 344 100.00% $119,518,462 100.00%
=== ====== ============ ======
</TABLE>
Weighted Average Periodic Cap: 1.753%
A-6
<PAGE>
NEXT RATE ADJUSTMENT DATE
FOR ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE PERCENT BY
NUMBER PRINCIPAL AGGREGATE
NUMBER OF OF BALANCE PRINCIPAL
NEXT RATE MORTGAGE MORTGAGE AS OF BALANCE AS OF
ADJUSTMENT DATE LOANS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------- --------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C>
August 1, 1997........... 29 8.43% $ 5,237,332 4.38%
September 1, 1997........ 11 3.20 4,852,973 4.06
October 1, 1997.......... 50 14.53 18,596,016 15.56
November 1, 1997......... 76 22.09 25,713,148 21.51
December 1, 1997......... 72 20.93 27,257,812 22.81
January 1, 1998.......... 65 18.90 24,216,922 20.26
February 1, 1998......... 26 7.56 10,511,402 8.79
March 1, 1998............ 5 1.45 685,509 0.57
April 1, 2000............ 5 1.45 1,057,687 0.88
May 1, 2000.............. 2 0.58 432,321 0.36
June 1, 2000............. 2 0.58 357,339 0.30
July 1, 2000............. 1 0.29 600,000 0.50
--- ------ ----------- ------
Total.................... 344 100.00% 119,518,462 100.00%
=== ====== =========== ======
</TABLE>
A-7
<PAGE>
ORIGINAL TERM TO MATURITY IN MONTHS
<TABLE>
<CAPTION>
PERCENT BY
PERCENT BY AGGREGATE
ORIGINAL NUMBER OF NUMBER OF AGGREGATE PRINCIPAL PRINCIPAL BALANCE
TERM IN MORTGAGE MORTGAGE BALANCE AS OF AS OF
MONTHS LOANS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------- --------- ---------- ------------------- -----------------
<S> <C> <C> <C> <C>
0- 36............. 10 2.31% $ 2,633,230 1.93%
37- 60............. 45 10.39 12,030,030 8.82
61- 84............. 21 4.85 3,715,897 2.72
85- 96............. 4 0.92 470,527 0.35
97-120............. 42 9.70 7,170,548 5.26
121-180............. 26 6.00 7,173,045 5.26
181-300............. 7 1.62 3,664,925 2.69
300-360............. 278 64.20 99,514,827 72.97
--- ------ ------------ ------
Total:.............. 433 100.00% $136,373,032 100.00%
=== ====== ============ ======
</TABLE>
Weighted Average Original Term to Maturity in Months: 291.48
REMAINING TERM TO MATURITY IN MONTHS
<TABLE>
<CAPTION>
PERCENT BY
PERCENT BY AGGREGATE AGGREGATE
NUMBER PRINCIPAL PRINCIPAL
REMAINING NUMBER OF OF BALANCE AS OF BALANCE AS OF
TERM IN MORTGAGE MORTGAGE THE CUT- THE CUT-
MONTHS LOANS LOANS OFF DATE OFF DATE
--------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
0- 59........................ 95 21.94% $ 19,002,375 13.93%
60- 72........................ 9 2.08 1,607,943 1.18
72- 84........................ 15 3.46 2,907,503 2.13
84-107........................ 13 3.00 2,460,128 1.80
108-120........................ 4 0.92 1,662,462 1.22
120-167........................ 5 1.15 872,447 0.64
168-180........................ 7 1.62 4,680,423 3.43
180-227........................ 15 3.46 3,513,759 2.58
228-240........................ 4 0.92 2,968,497 2.18
241-287........................ 3 0.69 1,145,653 0.84
288-300........................ 7 1.62 2,516,662 1.85
301-323........................ 8 1.85 1,407,578 1.03
324-336........................ 12 2.77 4,294,707 3.15
336-348........................ 12 2.77 2,393,149 1.75
348-360........................ 224 51.73 84,939,746 62.28
--- ------ ------------ ------
Total:......................... 433 100.00% $136,373,032 100.00%
=== ====== ============ ======
</TABLE>
Weighted Average Remaining Term to Maturity in Months: 278.00
A-8
<PAGE>
YEAR OF FIRST DUE DATE
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF PERCENT BY AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
MORTGAGE NUMBER OF BALANCE AS OF BALANCE AS OF
YEAR LOANS MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---- --------- -------------- ------------------- -------------------
<S> <C> <C> <C> <C>
1985.......... 8 1.85% $ 2,281,880 1.67%
1988.......... 6 1.39 289,332 0.21
1989.......... 10 2.31 1,294,419 0.95
1990.......... 11 2.54 1,316,246 0.97
1991.......... 10 2.31 1,362,646 1.00
1992.......... 10 2.31 1,552,469 1.14
1993.......... 14 3.23 2,482,302 1.82
1994.......... 11 2.54 2,213,586 1.62
1995.......... 67 15.47 12,600,639 9.24
1996.......... 38 8.78 13,324,884 9.77
1997.......... 248 57.27 97,654,630 71.61
--- ------ ------------ ------
Total:........ 433 100.00% $136,373,032 100.00%
=== ====== ============ ======
</TABLE>
YEAR OF SCHEDULED MATURITY
<TABLE>
<CAPTION>
AGGREGATE
PRINCIPAL
PERCENT BY BALANCE AS OF PERCENT BY
NUMBER OF NUMBER OF THE CUT- AGGREGATE PRINCIPAL BALANCE
YEAR MORTGAGE LOANS MORTGAGE LOANS OFF DATE AS OF THE CUT-OFF DATE
---- -------------- -------------- ------------- ---------------------------
<S> <C> <C> <C> <C>
1997.................... 7 1.62% $ 1,235,338 0.91%
1998.................... 14 3.23 2,691,502 1.97
1999.................... 21 4.85 3,437,214 2.52
2000.................... 21 4.85 3,327,715 2.44
2001.................... 20 4.62 2,906,383 2.13
2002.................... 14 3.23 5,573,550 4.09
2003.................... 9 2.08 1,843,456 1.35
2004.................... 15 3.46 2,757,661 2.02
2005.................... 7 1.62 1,120,890 0.82
2006.................... 6 1.39 2,437,627 1.79
2007.................... 3 0.69 421,336 0.31
2008.................... 1 0.23 172,353 0.13
2009.................... 2 0.46 360,770 0.26
2010.................... 0 0.00 -- 0.00
2011.................... 2 0.46 1,158,294 0.85
2012.................... 6 1.39 3,749,192 2.75
2013.................... 0 0.00 -- 0.00
2014.................... 0 0.00 -- 0.00
2015.................... 14 3.23 3,061,218 2.24
2016.................... 1 0.23 452,541 0.33
2017.................... 4 0.92 2,968,497 2.18
2018.................... 0 0.00 -- 0.00
2019.................... 0 0.00 -- 0.00
2020.................... 1 0.23 67,013 0.05
2021.................... 2 0.46 1,078,640 0.79
2022.................... 8 1.85 2,672,493 1.96
2023.................... 1 0.23 127,782 0.09
2024.................... 9 2.08 1,894,385 1.39
2025.................... 15 3.46 5,009,364 3.67
2026.................... 12 2.77 4,040,508 2.96
2027.................... 218 50.35 81,807,310 59.99
--- ------ ------------ ------
Total:.................. 433 100.00% $136,373,032 100.00%
=== ====== ============ ======
</TABLE>
A-9
<PAGE>
AMORTIZATION TYPE
<TABLE>
<CAPTION>
AGGREGATE PERCENT BY
PRINCIPAL AGGREGATE
NUMBER OF PERCENT BY BALANCE AS OF PRINCIPAL BALANCE
MORTGAGE NUMBER OF THE CUT- AS OF
TYPE LOANS MORTGAGE LOANS OFF DATE THE CUT-OFF DATE
---- --------- -------------- ------------- -----------------
<S> <C> <C> <C> <C>
Fully Amortizing........ 337 77.83% $114,471,575 83.94%
Negative Amortization... 6 1.39 1,665,362 1.22
Amortizing Balloon...... 47 10.85 10,641,652 7.80
Interest-Only Balloon... 43 9.93 9,594,443 7.04
--- ------ ------------ ------
Total:.................. 433 100.00% $136,373,032 100.00%
=== ====== ============ ======
</TABLE>
BALLOON MORTGAGE LOANS
ORIGINAL TERM TO MATURITY IN MONTHS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE
AGGREGATE PRINCIPAL BALANCE
PERCENT BY PRINCIPAL OF BALLOON
NUMBER OF NUMBER OF BALANCE AS OF MORTGAGE LOANS
ORIGINAL TERM BALLOON BALLOON THE CUT- AS OF
IN MONTHS MORTGAGE LOANS MORTGAGE LOANS OFF DATE THE CUT-OFF DATE
------------- -------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C>
0-60............. 29 32.22% $ 8,108,482 40.07%
61-84............ 11 12.22 2,001,371 9.89
96............... 17 18.89 3,803,090 18.79
120.............. 28 31.11 5,363,926 26.51
180.............. 3 3.33 600,690 2.97
360.............. 2 2.22 358,536 1.77
--- ------ ----------- ------
Total:........... 90 100.00% $20,236,095 100.00%
=== ====== =========== ======
</TABLE>
Weighted Average Original Term to Maturity in Months: 88.798
A-10
<PAGE>
BALLOON MORTGAGE LOANS
REMAINING TERM TO MATURITY IN MONTHS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE
AGGREGATE PRINCIPAL BALANCE
PERCENT BY PRINCIPAL OF BALLOON
NUMBER OF NUMBER OF BALANCE AS OF MORTGAGE LOANS AS
REMAINING TERM BALLOON BALLOON THE CUT- OF THE CUT-
IN MONTHS MORTGAGE LOANS MORTGAGE LOANS OFF DATE OFF DATE
-------------- -------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C>
0- 59.......... 64 71.11% $13,065,256 64.25%
60- 72.......... 7 7.78 1,566,012 7.70
72- 84.......... 10 11.11 2,428,608 11.94
84-107.......... 5 5.56 1,418,994 6.98
108-120.......... 2 2.22 1,398,688 6.88
121-167.......... 1 1.11 164,733 0.81
168-180.......... 0 0.00 - 0.00
180-227.......... 0 0.00 - 0.00
228-240.......... 0 0.00 - 0.00
241-287.......... 1 1.11 291,523 1.43
--- ------ ----------- ------
Total:........... 90 100.00% $20,333,815 100.00%
=== ====== =========== ======
</TABLE>
Weighted Average Remaining Term to Maturity in Months: 57.45
The following table sets forth the range of remaining amortization terms of
each Balloon Mortgage Loan. The remaining amortization term of a Balloon
Mortgage Loan represents the number of months required to fully amortize the
Cut-off Date balance of each Balloon Mortgage Loan. However, the terms of a
Balloon Mortgage Loan require the borrower to pay the remaining balance of the
loan in full at maturity. At maturity, the remaining balance on the Balloon
Mortgage Loans will range from [ ]% to [ ]% of the original principal balance,
and will average [ ]% of the original balance. Borrowers often cannot find a
source for refinancing a Balloon Mortgage Loan, in which case the lender must
choose whether to extend the maturity of the loan or to foreclose or exercise
similar remedies for the defaults.
BALLOON MORTGAGE LOANS
REMAINING AMORTIZATION TERM
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE
AGGREGATE PRINCIPAL BALANCE
REMAINING PERCENT BY PRINCIPAL OF BALLOON
AMORTIZATION NUMBER OF NUMBER OF BALANCE AS OF MORTGAGE LOANS AS
TERM BALLOON BALLOON THE CUT- OF THE CUT-
IN MONTHS MORTGAGE LOANS MORTGAGE LOANS OFF DATE OFF DATE
------------ -------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C>
1-180.......... 3 6.38% $ 399,869 3.76%
181-240.......... 8 17.02 3,376,235 31.73
241-300.......... 25 53.19 3,747,218 35.21
301-360.......... 11 23.40 3,118,330 29.30
--- ------ ----------- ------
Total:........... 47 100.00% $10,641,652 100.00%
=== ====== =========== ======
</TABLE>
Weighted Average Remaining Amortization Term in Months: 271.66
A-11
<PAGE>
The following two tables set forth the range of Cut-off Date LTV Ratios and
Maturity Date LTV Ratios of the Initial Mortgage Loans. A "Cut-off Date LTV
Ratio" is a fraction, expressed as a percentage, the numerator of which is the
Cut-off Date Balance of an Initial Mortgage Loan, and the denominator of which
is the appraised value of the related Mortgaged Property as determined by an
appraisal thereof obtained in connection with the origination of such Initial
Mortgage Loan. The appraised value does not incorporate any pledges of
additional collateral which under SPTL's underwriting guidelines, are taken
into account in approving loans with a higher LTV than 75%. A "Maturity Date
LTV Ratio" is a fraction, expressed as a percentage, the numerator of which is
the principal balance of an Initial Mortgage Loan on the related maturity date
assuming all scheduled payments due prior thereto are made and there are no
principal prepayments, and the denominator of which is the appraised value of
the related Mortgaged Property as determined by an appraisal thereof obtained
in connection with the origination of such Initial Mortgage Loan. Because the
value of Mortgaged Properties at the maturity date may be different than such
appraisal value, there can be no assurance that the loan-to-value ratio for
any Initial Mortgage Loan determined at any time following origination thereof
will be lower than the Cut-off Date LTV Ratio or Maturity Date LTV Ratio,
notwithstanding any positive amortization of such Initial Mortgage Loan. It is
possible that the market value of a Mortgaged Property securing an Initial
Mortgage Loan may decline between the origination thereof and the related
maturity date.
An appraisal of each of the Mortgaged Properties was made between May 1994
and May 1997. It is possible that the market value of a Mortgaged Property
securing an Initial Mortgage Loan has declined since the most recent appraisal
for such Mortgaged Property, and that such market values could decline in the
future. All appraisals were obtained by SPTL in accordance with the
requirements of the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989, as amended ("FIRREA").
CUT-OFF DATE LTV RATIOS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
PERCENT BY BALANCE AS OF BALANCE
CUT-OFF DATE NUMBER OF NUMBER OF THE CUT- AS OF THE
LTV RATIOS MORTGAGE LOANS MORTGAGE LOANS OFF DATE CUT-OFF DATE
------------ -------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
<25.000........ 36 8.31% $ 2,771,949 2.03%
25.001- 30.000....... 7 1.62 1,266,394 0.93
30.001- 35.000....... 15 3.46 4,995,191 3.66
35.001- 40.000....... 14 3.23 2,315,977 1.70
40.001- 45.000....... 13 3.00 2,011,492 1.47
45.001- 50.000....... 37 8.55 9,416,029 6.90
50.001- 55.000....... 34 7.85 11,788,100 8.64
55.001- 60.000....... 50 11.55 18,740,306 13.74
60.001- 65.000....... 86 19.86 27,993,986 20.53
65.001- 70.000....... 77 17.78 30,685,262 22.50
70.001- 75.000....... 31 7.16 15,561,116 11.41
75.001- 80.000....... 7 1.62 2,506,863 1.84
80.001- 85.000....... 6 1.39 995,051 0.73
85.001- 90.000....... 5 1.15 692,026 0.51
90.001- 95.000....... 4 0.92 817,607 0.60
95.001-100.000....... 3 0.69 462,532 0.34
100.001-105.000....... 1 0.23 452,541 0.33
105.001-110.000....... 2 0.46 592,142 0.43
>110.000....... 1 0.23 164,371 0.12
Not Appraised 4 0.92 2,144,098 1.57
--- ------ ------------ ------
Total:................ 433 100.00% $136,373,032 100.00%
=== ====== ============ ======
</TABLE>
Weighted Average Cut-off Date LTV Ratio: 60.38
A-12
<PAGE>
BALLOON MORTGAGE LOAN
MATURITY DATE LTV RATIOS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE
AGGREGATE PRINCIPAL BALANCE
PERCENT BY PRINCIPAL OF BALLOON
NUMBER OF NUMBER OF BALANCE AS OF MORTGAGE LOANS AS
MATURITY DATE BALLOON BALLOON THE CUT- OF THE CUT-
LTV RATIOS MORTGAGE LOANS MORTGAGE LOANS OFF DATE OFF DATE
------------- -------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C>
<50.0000...... 35 38.89% $ 5,847,873 28.90%
50.0001-55.0000.. 10 11.11 3,192,879 15.78
55.0001-60.0000.. 6 6.67 3,205,872 15.84
60.0001-65.0000.. 9 10.00 2,479,313 12.25
>65.0000...... 30 33.33 5,510,158 27.23
--- ------ ----------- ------
Total:........... 90 100.00% $20,236,095 100.00%
=== ====== =========== ======
</TABLE>
Weighted Average Maturity Date LTV Ratio: 56.21
The "Debt Service Coverage Ratio" or "DSCR" for any Initial Mortgage Loan is
the ratio of Net Operating Income produced by the related Mortgaged Property,
in most cases as underwritten by SPTL, to the amounts of principal and
interest, not fully indexed, due under such Initial Mortgage Loan as of the
Cut-off Date. Generally, "Net Operating Income" or "NOI" for a Mortgaged
Property equals the operating revenues for such Mortgaged Property minus its
operating expenses and replacement reserves, but without giving effect to debt
service, depreciation, non-recurring capital expenditures, tenant
improvements, leasing commissions and similar items. The Net Operating Income
of a Mortgage Property was determined based on SPTL's underwriting guidelines,
including appraisals, and do not necessarily reflect the operating statements
for the Mortgaged Properties obtained from the respective Mortgagors. The
information contained herein was unaudited, and the Company has made no
attempt to verify its accuracy. The information derived from these sources was
not uniform among the Initial Mortgage Loans.
A-13
<PAGE>
DEBT SERVICE COVERAGE RATIOS
FOR MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE PERCENT BY
PRINCIPAL AGGREGATE
PERCENT BY BALANCE AS OF PRINCIPAL BALANCE
DEBT SERVICE NUMBER OF NUMBER OF THE CUT- AS OF THE CUT-OFF
COVERAGE RATIO MORTGAGE LOANS MORTGAGE LOANS OFF DATE DATE
-------------- -------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C>
0.5001x-0.7500x.. % $ %
0.7501-1.0000....
1.0001-1.2500....
1.2501-1.5000....
1.5001-1.7500....
1.7501-2.0000....
2.0001-2.2500....
2.2501-2.5000....
2.5001-2.7500....
2.7501-3.0000....
3.0001+..........
--- ------ ------------ ------
Total:........... 100.00% $136,373,032 100.00%
=== ====== ============ ======
</TABLE>
Weighted Average Debt Service Coverage Ratio: [ ]
YEAR OF CALCULATION OF UNDERWRITTEN NOI
<TABLE>
<CAPTION>
PERCENT BY
PERCENT BY AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
NUMBER OF NUMBER OF BALANCE AS OF BALANCE AS OF
YEAR MORTGAGE LOANS MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
---- -------------- -------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Unknown.. % $ %
1994.....
1995.....
1996.....
1997.....
--- ------ ------------ ------
Total:... 100.00% $136,373,032 100.00%
=== ====== ============ ======
</TABLE>
A-14
<PAGE>
The Initial Mortgage Loans are secured by Mortgaged Properties located in
[ ] different states. The table below sets forth the states in which the
Mortgaged Properties are located:
GEOGRAPHIC DISTRIBUTION (1)
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
PRINCIPAL PRINCIPAL
BALANCE AS BALANCE AS
PERCENT BY OF OF THE
NUMBER OF NUMBER OF THE CUT- CUT-OFF
STATE MORTGAGE LOANS MORTGAGE LOANS OFF DATE DATE
----- -------------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
Massachusetts............ 1 0.23% $ 1,990,319 1.46%
Connecticut.............. 1 0.23 140,556 0.10
New Jersey............... 7 1.62 3,627,493 2.66
New York................. 1 0.23 2,350,000 1.72
Florida.................. 3 0.69 544,115 0.40
Ohio..................... 1 0.23 159,892 0.12
Illinois................. 1 0.23 1,498,994 1.10
Nebraska................. 1 0.23 399,718 0.29
Texas.................... 8 1.85 4,001,492 2.93
Colorado................. 20 4.62 7,295,159 5.35
Utah..................... 3 0.69 695,778 0.51
Arizona.................. 27 6.24 12,101,500 8.87
New Mexico............... 1 0.23 60,000 0.04
Nevada................... 6 1.39 1,673,074 1.23
Southern California(1)... 279 64.43 64,149,524 47.04
Northern California(1)... 27 6.24 10,370,314 7.60
Oregon 20 4.62 9,802,786 7.19
Washington............... 18 4.16 11,040,575 8.10
Other.................... 8 1.85 4,471,742 3.28
--- ------ ------------ ------
Total:................... 433 100.00% $136,373,032 100.00%
=== ====== ============ ======
</TABLE>
- --------
(1) Mortgaged Properties are deemed to be in California (Southern) if located
in California with zip codes less than or equal to 93600. Mortgaged
Properties are deemed to be in California (Northern) if located in
California with zip codes greater than 93600.
A-15
<PAGE>
PROPERTY TYPES(1)
<TABLE>
<CAPTION>
AGGREGATE PERCENT BY
PRINCIPAL AGGREGATE
NUMBER OF PERCENT BY BALANCE AS OF PRINCIPAL BALANCE
MORTGAGE NUMBER OF THE CUT- AS OF
PROPERTY TYPE LOANS MORTGAGE LOANS OFF DATE THE CUT-OFF DATE
------------- --------- -------------- ------------- -----------------
<S> <C> <C> <C> <C>
Commercial............ 150 34.64% $ 48,983,443 35.92%
Multifamily........... 283 65.36 87,389,589 64.08
--- ------ ------------ ------
Total:................ 433 100.00% $136,373,032 100.00%
=== ====== ============ ======
</TABLE>
- --------
(1) Property types reflect primary use of property.
LOAN PURPOSES(1)
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF PERCENT BY AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
LOAN MORTGAGE NUMBER OF BALANCE AS OF BALANCE AS OF
PURPOSE LOANS MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
------- --------- -------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Purchase...... 411 94.92% $133,274,597 97.73%
Refinance..... 22 5.08 3,098,435 2.27
--- ------ ------------ ------
Total:........ 433 100.00% $136,373,032 100.00%
=== ====== ============ ======
</TABLE>
- --------
(1) Includes cash-out refinancing
A-16
<PAGE>
Approximately [ ]% of the Initial Mortgage Loans provide that if the related
mortgagor prepays the principal balance thereof in an amount in excess of 20%
of the original principal balance of the related Mortgage Loan for any 12-
month period during a certain period of time following the origination (the
"Prepayment Period"), such mortgagor will be required to pay a prepayment
premium equal to six months' interest at the Mortgage Interest Rate then in
effect for such Initial Mortgage Loan on the amount of such prepayment in
excess of 20% of the original principal amount thereof (a "Prepayment
Premium"). The following table sets forth the approximate months remaining in
the Prepayment Premium Period of the Initial Mortgage Loans.
MONTHS OF PREPAYMENT PREMIUM PERIOD
REMAINING AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENT BY
MONTHS OF AGGREGATE
PREPAYMENT NUMBER OF PERCENT BY AGGREGATE PRINCIPAL PRINCIPAL BALANCE
PREMIUM PERIOD MORTGAGE NUMBER OF BALANCE AS OF AS OF
REMAINING LOANS MORTGAGE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
-------------- --------- -------------- ------------------- -----------------
<S> <C> <C> <C> <C>
None............ 151 34.87% $ 28,997,816 21.26%
1- 6........... 4 0.92 4,228,904 3.10
7-12........... 27 6.24 9,522,183 6.98
13-18........... 9 2.08 1,473,708 1.08
19-24........... 8 1.65 1,626,012 1.19
25-30........... 14 3.23 6,048,165 4.44
31-36........... 208 48.04 81,232,304 59.57
37-42........... 1 0.23 1,552,035 1.14
43+............. 11 2.54 1,691,904 1.24
--- ------ ------------ ------
Total:.......... 433 100.00% $136,373,032 100.00%
=== ====== ============ ======
</TABLE>
Weighted Average Months of Prepayment Premium Period Remaining: 17.22
INDICES
General. The Mortgage Interest Rate on approximately 87.64% of the Initial
Mortgage Loans will generally adjust periodically to a rate equal to the sum
of the related Index and the margin set forth on the related Mortgage Note
(the "Note Margin"). The Index on each Initial Mortgage Loan will be Six-Month
LIBOR, Bank of America Prime, Wall Street Journal Prime, Six-Month U.S.
Treasury or One-Year U.S. Treasury, all as more fully described below. The
Mortgage Interest Rate on each Mortgage Loan prior to the first date on which
such Mortgage Interest Rate adjusts (each such date, a "Rate Adjustment Date")
is typically an introductory rate which is generally lower than the rate which
would have been in effect based on the related Index and Note Margin. A
description of each Index is set forth below.
Six-Month LIBOR Index. The Index for 58.73% of the Initial Mortgage Loans
will be Six-Month LIBOR. Six-Month LIBOR for any Six-Month LIBOR Mortgage Loan
will generally be calculated for each six-month accrual period as the six-
month London Interbank Offered Rate for U.S. Dollar deposits published in The
Wall Street Journal on the 25th day (or if such day is not a business day, the
following business day) of the month preceding the month of the Rate
Adjustment Date for such Initial Mortgage Loan. Listed below are levels of
Six-Month LIBOR as published by The Wall Street Journal on such dates. Such
levels may fluctuate significantly from month to month as well as over longer
periods and may not increase or decrease in a constant pattern from period to
period. The following does not purport to be representative of future levels
of Six-Month LIBOR as published in The Wall Street Journal. No assurance can
be given as to the level of Six-Month LIBOR for any Rate Adjustment Date or
during the life of any Six-Month LIBOR Mortgage Loan.
A-17
<PAGE>
SIX-MONTH LIBOR
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
January............................... 4.313% 3.438% 3.375% 6.750% 5.735% 5.719%
February.............................. 4.500 3.313 4.000 6.438 5.188 5.594
March................................. 4.625 3.313 4.188 6.438 5.469 5.938
April................................. 4.250 3.313 4.625 6.313 5.563 6.031
May................................... 4.125 3.438 5.000 6.125 5.594 5.969
June.................................. 4.125 3.563 5.000 5.813 5.781
July.................................. 3.625 3.563 5.250 5.938 5.844
August................................ 3.563 3.438 5.313 6.000 5.688
September............................. 3.438 3.375 5.688 5.844 5.875
October............................... 3.563 3.375 5.938 5.906 5.625
November.............................. 3.938 3.500 6.313 5.688 5.531
December.............................. 3.625 3.500 6.938 5.594 5.688
</TABLE>
Bank of America Prime Index. The Index for 13.51% of the Initial Mortgage
Loans will be Bank of America Prime. Bank of America Prime for any Bank of
America Prime Mortgage Loan will be the prime lending rate of the Bank of
America N.T. & S.A. as publicly announced by Bank of America N.T. & S.A. as
its prime rate as most recently available on the indicated Rate Adjustment
Dates. Listed below are levels of Bank of America Prime that were applicable
to mortgage loans on such date. Such levels may fluctuate significantly from
month to month as well as over longer periods and may not increase or decrease
in constant pattern from period to period. The following does not purport to
be representative of future levels of Bank of America Prime. No assurance can
be given as to the level of Bank of America Prime for any Rate Adjustment Date
or during the life of any Bank of America Prime Mortgage Loan.
BANK OF AMERICA PRIME
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
January 1................................... 6.50% 6.00% 6.00% 8.50% 8.50% 8.25%
February 1.................................. 6.50 6.00 6.00 9.00 8.25 8.25
March 1..................................... 6.50 6.00 6.00 9.00 8.25 8.25
April 1..................................... 6.50 6.00 6.25 9.00 8.25 8.50
May 1....................................... 6.50 6.00 6.75 9.00 8.25 8.50
June 1...................................... 6.50 6.00 7.25 9.00 8.25 8.50
July 1...................................... 6.50 6.00 7.25 9.00 8.25
August 1.................................... 6.00 6.00 7.25 8.75 8.25
September 1................................. 6.00 6.00 7.75 8.75 8.25
October 1................................... 6.00 6.00 7.75 8.75 8.25
November 1.................................. 6.00 6.00 7.75 8.75 8.25
December 1.................................. 6.00 6.00 8.50 8.75 8.25
</TABLE>
Six-Month U.S. Treasury Index. The Index for 2.79% of the Mortgage Loans
will be the Six-Month U.S. Treasury. The Six-Month U.S. Treasury is currently
calculated based on information reported in the Federal Reserve board's
Statistical Release No. H.15(519). Listed below are the weekly average yields
on actively traded U.S. Treasury securities adjusted to a constant maturity of
six-months as reported by the Federal Reserve Board in Statistical Release No.
H.15(519) that was most recently available as of the date indicated. Such
average yields may fluctuate significantly from week to seek as well as over
longer periods and may not increase or decrease in constant pattern from
period to period. The following does not purport to be representative of
future average yields. No assurance can be given as to the average yields on
such U.S. Treasury securities on any Rate Adjustment Date or during the life
of any Six-Month Treasury Mortgage Loan.
A-18
<PAGE>
SIX-MONTH U.S. TREASURY
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
January 1............................. 3.996% 3.354% 3.333% 6.489% 5.152% 5.301%
February 1............................ 4.058 3.176 3.292 6.462 4.963 5.246
March 1............................... 4.258 3.134 3.828 6.177 4.961 5.373
April 1............................... 4.239 3.093 4.047 6.086 5.192 5.527
May 1................................. 3.889 3.03 4.522 6.075 5.27 5.526
June 1................................ 4.005 3.291 4.822 5.691 5.374 5,385
July 1................................ 3.375 3.177 4.819 5.601 5.405 5.334
August 1.............................. 3.355 3.312 4.872 5.638 5.408
September 1........................... 3.313 3.187 4.981 5.516 5.479
October 1............................. 2.832 3.113 5.501 5.57 5.345
November 1............................ 3.324 3.333 5.752 5.488 5.288
December 1............................ 3.597 3.355 6.278 5.431 5.234
</TABLE>
One-Year U.S. Treasury Index. The Index for 11.23% of the Mortgage Loans
will be the One-Year U.S. Treasury. The One-Year U.S. Treasury is currently
calculated based on information reported in the Federal Reserve board's
Statistical Release No. H.15(519). Listed below are the weekly average yields
on actively traded U.S. Treasury securities adjusted to a constant maturity of
one year as reported by the Federal Reserve Board in Statistical Release No.
H.15(519) that was most recently available as of the date indicated. Such
average yields may fluctuate significantly from week to seek as well as over
longer periods and may not increase or decrease in constant pattern from
period to period. The following does not purport to be representative of
future average yields. No assurance can be given as to the average yields on
such U.S. Treasury securities on any Rate Adjustment Date or during the life
of any One-Year Treasury Mortgage Loan.
ONE-YEAR U.S. TREASURY
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
January 1............................. 4.170% 3.643% 3.600% 7.120% 5.300% 5.500%
February 1............................ 4.142 3.408 3.510 6.950 5.050 5.610
March 1............................... 4.373 3.312 4.010 6.540 5.040 5.470
April 1............................... 4.644 3.300 4.360 6.370 5.420 5.940
May 1................................. 4.324 3.184 4.900 6.240 5.520 6.010
June 1................................ 4.267 3.550 5.290 5.920 5.590 5.850
July 1................................ 4.136 3.526 5.300 5.590 5.790
August 1.............................. 3.532 3.530 5.510 5.720 5.850
September 1........................... 3.518 3.366 5.610 5.810 5.640
October 1............................. 3.156 3.392 5.850 5.570 5.720
November 1............................ 3.482 3.462 6.220 5.580 5.560
December 1............................ 3.755 3.610 6.630 5.440 5.420
</TABLE>
A-19
<PAGE>
CERTAIN CHARACTERISTICS OF THE TOP 50 MORTGAGE LOANS AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
LOAN ZIP PROPERTY YEAR UNITS/ APPRAISAL APPRAISAL MATURITY ORIGINAL CUT-OFF INTEREST OCCUPANCY
NUMBER ADDRESS CITY STATE CODE TYPE BUILT SF(1) VALUE DATE LTV DATE LTV(2) BALANCE BALANCE RATE RATE
- ------ ------- ---- ----- ---- -------- ----- ------ --------- --------- --- ----------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- ----
(1) Units/square feet represents the number of multifamily, mobile home park,
and self storage properties and square feet for all other properties.
(2) The Maturity Date LTV Ratio is a fraction, calculated as a percentage, the
numerator of which is the Balloon Payment and the denominator of which is
the appraised value of the related Mortgaged Property as determined by an
appraisal thereof generally obtained in connection with the origination of
such Mortgage Loan.
A-20
<PAGE>
CERTAIN CHARACTERISTICS OF THE TOP 50 MORTGAGE LOANS AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
MAXIMUM
LOAN REMAINING REMAINING FIRST MATURITY YEAR OF NOI MORTGAGE
NUMBER P&I TERM AMORT TERM PAYMENT DATE DATE NOI DETERMINATION DSCR INDEX MARGIN PERIODIC CAP INTEREST RATE
- ------ --- --------- ---------- ------------ -------- --- ------------- ---- ----- ------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
MINIMUM RATE AND
LOAN MORTGAGE PAYMENT NEXT RATE LOAN
NUMBER INTEREST RATE RESET FREQ CHANGE DATE PURPOSE(1)
- ------ ------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
</TABLE>
- -----
(1) Includes cash-out refinancing.
A-21
<PAGE>
ANNEX B
CERTAIN CHARACTERISTICS OF THE JPM MORTGAGE LOANS
The following tables set forth certain information about the JPM Mortgage
Loans as of June 1, 1997. The totals in the following tables may not add up to
100% due to rounding.
MORTGAGE INTEREST RATES
AS OF JUNE 1, 1997(1)
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE PRINCIPAL PERCENT BY AGGREGATE
NUMBER OF JPM NUMBER OF JPM BALANCE AS OF JUNE 1, PRINCIPAL BALANCE AS OF
MORTGAGE INTEREST RATES MORTGAGE LOANS MORTGAGE LOANS 1997 JUNE 1, 1997
----------------------- -------------- -------------- --------------------- -----------------------
<S> <C> <C> <C> <C>
7.0001%- 7.5000%....... 134 24.81% $ 48,948,572 24.10%
7.5001 - 8.0000....... 94 17.41 32,266,453 15.89
8.0001 - 8.5000....... 28 5.19 16,293,895 8.02
8.5001 - 9.0000....... 63 11.67 26,530,741 13.06
9.0001 - 9.5000....... 76 14.07 33,490,158 16.49
9.5001 -10.0000....... 79 14.63 24,899,822 12.26
10.0001 -10.5000....... 24 4.44 9,074,743 4.47
10.5001 -11.0000....... 21 3.89 5,206,593 2.56
11.0001 -11.5000....... 3 0.56 698,015 0.34
11.5001 -12.0000....... 13 2.41 4,805,596 2.37
12.0001 -12.5000....... 5 0.93 860,866 0.42
--- ------ ------------ ------
Total:.................. 540 100.00% $203,075,453 100.00%
=== ====== ============ ======
</TABLE>
Weighted Average Mortgage Interest Rate: 8.7271%
- --------
(1) Each JPM Mortgage Loan is an adjustable rate mortgage loan.
B-1
<PAGE>
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE PRINCIPAL AGGREGATE
PRINCIPAL BALANCE NUMBER OF PERCENT BY NUMBER BALANCE PRINCIPAL BALANCE
AS OF THE CUT-OFF DATE MORTGAGE LOANS OF MORTGAGE LOANS AS OF JUNE 1, 1997 AS OF JUNE 1, 1997
---------------------- -------------- ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
$0.01 - $100,000.00.......... 38 7.04% $ 3,207,812 1.58%
100,000.01 - 200,000.00.......... 181 33.52 27,427,689 13.51
200,000.01 - 300,000.00.......... 108 20.00 26,393,843 13.00
300,000.01 - 400,000.00.......... 61 11.30 21,041,128 10.36
400,000.01 - 500,000.00.......... 40 7.41 18,195,642 8.96
500,000.01 - 600,000.00.......... 19 3.52 10,528,698 5.18
600,000.01 - 700,000.00.......... 18 3.33 11,575,600 5.70
700,000.01 - 800,000.00.......... 14 2.59 10,745,099 5.29
800,000.01 - 900,000.00.......... 14 2.59 11,686,912 5.75
900,000.01 - 1,000,000.00.......... 9 1.67 8,555,922 4.21
1,000,000.01 - 1,100,000.00.......... 10 1.85 10,516,985 5.18
1,100,000.01 - 1,200,000.00.......... 5 0.93 5,818,353 2.87
1,200,000.01 - 1,300,000.00.......... 4 0.74 4,988,573 2.46
1,300,000.01 - 1,400,000.00.......... 5 0.93 6,734,406 3.32
1,400,000.01 - 1,500,000.00.......... 3 0.56 4,359,868 2.15
1,500,000.01 - 1,600,000.00.......... 2 0.37 3,141,564 1.55
1,600,000.01 - 1,700,000.00.......... 2 0.37 3,339,038 1.64
1,700,000.01 - 1,800,000.00.......... 1 0.19 1,791,407 0.88
1,800,000.01 - 1,900,000.00.......... 1 0.19 1,863,857 0.92
1,900,000.01 - 2,000,000.00.......... 2 0.37 3,985,343 1.96
2,000,000.01 - 2,100,000.00.......... 2 0.37 4,099,154 2.02
3,000,000.01 - 3,100,000.00.......... 1 0.19 3,078,561 1.52
--- ------ ------------ ------
Total................................. 540 100.00% $203,075,453 100.00%
=== ====== ============ ======
</TABLE>
Average Principal Balance: $376,066
B-2
<PAGE>
INDICES
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE PRINCIPAL PERCENT BY AGGREGATE
NUMBER OF JPM NUMBER OF JPM BALANCE AS OF PRINCIPAL BALANCE AS OF
INDEX MORTGAGE LOANS MORTGAGE LOANS JUNE 1, 1997 JUNE 1, 1997
----- -------------- -------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
One-Year U.S. Treasury.. 47 8.70% $ 24,949,643 12.29%
Six-Month LIBOR......... 438 81.11 164,263,870 80.89
Prime................... 55 10.19 13,861,940 6.83
--- ------ ------------ ------
Total:.................. 540 100.00% $203,075,453 100.00%
=== ====== ============ ======
</TABLE>
NOTE MARGINS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE PRINCIPAL PERCENT BY AGGREGATE
NUMBER OF JPM NUMBER OF JPM BALANCE AS OF PRINCIPAL BALANCE AS OF
NOTE MARGIN MORTGAGE LOANS MORTGAGE LOANS JUNE 1, 1997 JUNE 1, 1997
----------- -------------- -------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
2.5001%-3.0000%......... 26 4.81% $ 13,362,649 6.58%
3.0001 -3.5000......... 58 10.74 24,263,435 11.95
3.5001 -4.0000......... 277 51.30 96,472,719 47.51
4.0001 -4.5000......... 109 20.19 41,389,764 20.38
4.5001 -5.0000......... 55 10.19 20,336,941 10.01
5.0001 -5.5000......... 13 2.41 4,894,160 2.41
5.5001 -6.0000......... 2 0.37 2,355,785 1.16
--- ------ ------------ ------
Total:.................. 540 100.00% $203,075,453 100.00%
=== ====== ============ ======
</TABLE>
Weighted Average Note Margin: 3.9869%
MINIMUM MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
MINIMUM PERCENT BY AGGREGATE PRINCIPAL PERCENT BY AGGREGATE
MORTGAGE NUMBER OF JPM NUMBER OF JPM BALANCE AS OF PRINCIPAL BALANCE AS OF
INTEREST RATE MORTGAGE LOANS MORTGAGE LOANS JUNE 1, 1997 JUNE 1, 1997
------------- -------------- -------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
6.5001%- 7.0000%....... 3 0.56% $ 2,631,409 1.30%
7.0001 - 7.5000....... 238 44.07 97,021,083 47.78
7.5001 - 8.0000....... 201 37.22 67,727,440 33.35
8.0001 - 8.5000....... 39 7.22 16,424,505 8.09
8.5001 - 9.0000....... 45 8.33 14,637,452 7.21
9.0001 - 9.5000....... 9 1.67 3,111,033 1.53
9.5001 -10.0000....... 3 0.56 824,356 0.41
10.0001 -10.5000....... 1 0.19 99,617 0.05
10.5001 -11.0000....... 1 0.19 598,557 0.29
--- ------ ------------ ------
Total:.................. 540 100.00% $203,075,453 100.00%
=== ====== ============ ======
</TABLE>
Weighted Average Minimum Mortgage Interest Rate: 7.7796%
B-3
<PAGE>
MAXIMUM MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
MAXIMUM PERCENT BY AGGREGATE PRINCIPAL PERCENT BY AGGREGATE
MORTGAGE NUMBER OF JPM NUMBER OF JPM BALANCE AS OF PRINCIPAL BALANCE AS OF
INTEREST RATE MORTGAGE LOANS MORTGAGE LOANS JUNE 1, 1997 JUNE 1, 1997
------------- -------------- -------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
12.9500% - 13.0000%..... 3 0.56 $ 2,631,409 1.30%
13.0001 - 14.0000...... 423 78.33 162,878,574 80.21
14.0001 - 15.0000...... 99 18.33 33,746,634 16.62
15.0001 - 16.0000...... 12 2.22 3,345,619 1.65
16.0001 - 17.0000...... 2 0.37 373,598 0.18
17.0001 - 18.0000...... 1 0.19 99,617 0.05
--- ------ ------------ ------
Total:.................. 540 100.00% $203,075,453 100.00%
=== ====== ============ ======
Weighted Average Maximum Mortgage Interest Rate: 13.7990%
PERIODIC CAP
<CAPTION>
PERCENT BY AGGREGATE PRINCIPAL PERCENT BY AGGREGATE
NUMBER OF JPM NUMBER OF JPM BALANCE AS OF PRINCIPAL BALANCE AS OF
PERIODIC CAP MORTGAGE LOANS MORTGAGE LOANS JUNE 1, 1997 JUNE 1, 1997
------------ -------------- -------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
0.5001% - 1.0000%....... 1 0.19 $ 472,316 0.23%
1.0001 - 1.5000........ 291 53.89 110,226,072 54.28
1.5001 - 2.0000........ 248 45.93 92,377,066 45.49
--- ------ ------------ ------
Total:.................. 540 100.00% $203,075,453 100.00%
=== ====== ============ ======
</TABLE>
Weighted Average Periodic Cap: 1.7263%
NEXT RATE ADJUSTMENT DATE
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE PRINCIPAL PERCENT BY AGGREGATE
NEXT RATE NUMBER OF JPM NUMBER OF JPM BALANCE AS OF PRINCIPAL BALANCE AS OF
ADJUSTMENT DATE MORTGAGE LOANS MORTGAGE LOANS JUNE 1, 1997 JUNE 1, 1997
--------------- -------------- -------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
September 1, 1997....... 111 20.56% $ 41,464,108 20.42%
October 1, 1997......... 63 11.67 29,942,514 14.74
November 1, 1997........ 59 10.93 20,283,626 9.99
December 1, 1997........ 76 14.07 25,412,272 12.51
January 1, 1998......... 8 1.48 1,888,250 0.93
January 1, 2000......... 1 0.19 991,643 0.49
February 1, 2000........ 1 0.19 349,069 0.17
March 1, 2000........... 1 0.19 164,632 0.08
April 1, 2000........... 1 0.19 185,390 0.09
Other................... 219 40.56 92,393,950 40.57
--- ------ ------------ ------
Total:.................. 540 100.00% $203,075,453 100.00%
=== ====== ============ ======
</TABLE>
B-4
<PAGE>
YEAR OF SCHEDULED MATURITY
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE PRINCIPAL PERCENT BY AGGREGATE
NUMBER OF JPM NUMBER OF JPM BALANCE AS OF PRINCIPAL BALANCE AS OF
YEAR MORTGAGE LOANS MORTGAGE LOANS JUNE 1, 1997 JUNE 1, 1997
---- -------------- -------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
2003.................... 2 0.37% $ 1,572,768 0.77%
2004.................... 1 0.19 149,464 0.07
2006.................... 4 0.74 3,051,808 1.50
2011.................... 4 0.74 3,045,959 1.50
2012.................... 2 0.37 638,792 0.31
2016.................... 6 1.11 1,885,531 0.93
2017.................... 2 0.37 487,829 0.24
2021.................... 2 0.37 1,108,277 0.55
2022.................... 2 0.37 760,209 0.37
2024.................... 6 1.11 3,138,013 1.55
2025.................... 21 3.89 8,448,106 4.16
2026.................... 308 57.04 111,419,985 54.87
2027.................... 180 33.33 67,368,711 33.17
--- ------ ------------ ------
Total:.................. 540 100.00% $203,075,453 100.00%
=== ====== ============ ======
</TABLE>
Nine of the Mortgage Loans, representing 3.08% of the Mortgage Loans, are
Balloon Mortgage Loans. The weighted average original term to maturity for the
Balloon Mortgage Loans is 126 months. The weighted average remaining term to
maturity for the Balloon Mortgage Loans is 115 months. The weighted average
remaining amortization term for the Balloon Mortgage Loans is 341 months. The
remaining amortization term of a Balloon Mortgage Loan represents the number
of months required to fully amortize the principal balance of each Balloon
Mortgage Loan, as of June 1, 1997.
Approximately 95.95% of the JPM Mortgage Loans provide that if the related
mortgagor prepays the principal balance thereof in an amount in excess of 20%
of the original principal balance of the related Mortgage Loan for any 12-
month period during a certain period of time following origination (the
"Prepayment Premium Period"), such mortgagor will be required to pay a
prepayment premium equal to six months' interest at the Mortgage Interest Rate
then in effect for such Mortgage Loan on the amount of such prepayment in
excess of 20% of the original principal amount thereof (a "Prepayment
Premium"). The following table sets forth the approximate months remaining in
the Prepayment Premium Period of the Mortgage Loans. Any net Prepayment
Premium collected will be distributed solely to the holders of the Class X
Certificates.
MONTHS OF PREPAYMENT PREMIUM PERIOD REMAINING AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE PRINCIPAL PERCENT BY AGGREGATE
MONTHS OF PREPAYMENT PREMIUM NUMBER OF JPM NUMBER OF JPM BALANCE AS OF PRINCIPAL BALANCE AS OF
PERIOD REMAINING MORTGAGE LOANS MORTGAGE LOANS JUNE 1, 1997 JUNE 1, 1997
- ---------------------------- -------------- -------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
None.................... 16 2.96% $ 8,222,568 4.05%
1-6..................... 44 8.15 24,012,671 11.82
7-12.................... 20 3.70 6,213,134 3.06
13-18................... 10 1.85 3,659,014 1.80
19-24................... 19 3.52 4,180,706 2.06
25-30................... 261 48.33 93,967,842 46.27
31-36................... 169 31.30 62,695,988 30.87
43+..................... 1 0.19 123,529 0.06
--- ------ ------------ ------
Total:.................. 540 100.00% $203,075,453 100.00%
=== ====== ============ ======
</TABLE>
Weighted Average Months of Prepayment Premium Period Remaining: 24.
B-5
<PAGE>
CERTAIN CHARACTERISTICS OF THE TOP 50 JPM MORTGAGE LOANS AS OF THE CUT-OFF
DATE
<TABLE>
<CAPTION>
LOAN ZIP PROPERTY YEAR UNITS/ APPRAISAL APPRAISAL MATURITY ORIGINAL CUT-OFF INTEREST OCCUPANCY
NUMBER ADDRESS CITY STATE CODE TYPE BUILT SF(1) VALUE DATE LTV DATE LTV(2) BALANCE BALANCE RATE RATE
- ------ ------- ---- ----- ---- -------- ----- ------ --------- --------- --- ----------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- ----
(1) Units/square feet represents the number of multifamily, mobile home park,
and self storage properties and square feet for all other properties.
(2) The Maturity Date LTV Ratio is a fraction, calculated as a percentage, the
numerator of which is the Balloon Payment and the denominator of which is
the appraised value of the related Mortgaged Property as determined by an
appraisal thereof generally obtained in connection with the origination of
such Mortgage Loan.
B-6
<PAGE>
CERTAIN CHARACTERISTICS OF THE TOP 50 JPM MORTGAGE LOANS AS OF THE
CUT-OFF DATE
<TABLE>
<CAPTION>
MAXIMUM
LOAN REMAINING REMAINING FIRST MATURITY YEAR OF NOI MORTGAGE
NUMBER P&I TERM AMORT TERM PAYMENT DATE DATE NOI DETERMINATION DSCR INDEX MARGIN PERIODIC CAP INTEREST RATE
- ------ --- --------- ---------- ------------ -------- --- ------------- ---- ----- ------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
MINIMUM RATE AND
MORTGAGE PAYMENT NEXT RATE LOAN
INTEREST RATE RESET FREQ CHANGE DATE PURPOSE(1)
- ------------- ---------- ----------- ----------
<S> <C> <C> <C>
</TABLE>
- ----
(1) Includes cash-out refinancing.
B-7
<PAGE>
ANNEX C
CHARACTERISTICS OF THE SPTL MORTGAGE LOANS
As of June 1, 1997, the SPTL Mortgage Loans had characteristics set forth
below. The totals in the following tables may not add up to 100% due to
rounding.
MORTGAGE INTEREST RATES
AS OF JUNE 1, 1997(1)
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE PRINCIPAL PERCENT BY AGGREGATE
NUMBER OF SPTL NUMBER OF SPTL BALANCE AS OF PRINCIPAL BALANCE AS OF
MORTGAGE INTEREST RATES MORTGAGE LOANS MORTGAGE LOANS [ ], 1997 [ ], 1997
----------------------- -------------- -------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
4.5000% - 5.0000%....... 0 0.00% $ -- 0.00%
5.0001 - 5.5000......... 0 0.00 -- 0.00
5.5001 - 6.0000......... 0 0.00 -- 0.00
6.0001 - 6.5000......... 1 0.12 77,920 0.03
6.5001 - 7.0000......... 0 0.00 -- 0.00
7.0001 - 7.5000......... 17 2.12 16,037,593 6.20
7.5001 - 8.0000......... 24 2.99 6,792,550 2.63
8.0001 - 8.5000......... 31 3.87 7,949,256 3.07
8.5001 - 9.0000......... 47 5.86 19,472,394 7.53
9.0001 - 9.5000......... 102 12.72 35,494,001 13.72
9.5001 - 10.000......... 112 13.97 39,849,328 15.40
10.001 - 11.000......... 230 28.68 67,981,983 26.28
11.001 - 12.000......... 129 16.08 43,518,666 16.82
12.001 - 13.000......... 101 12.59 21,031,640 8.13
13.001& Above........... 8 1.00 516,382 0.20
--- ------ ------------ ------
Total:.................. 802 100.00% $258,721,713 100.00%
=== ====== ============ ======
</TABLE>
- --------
(1)Each SPTL Mortgage Loan is an adjustable rate mortgage loan.
C-1
<PAGE>
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE
AGGREGATE PRINCIPAL PRINCIPAL
PRINCIPAL BALANCE NUMBER OF PERCENT BY NUMBER BALANCE AS OF BALANCE AS OF
AS OF THE CUT-OFF DATE MORTGAGE LOANS OF MORTGAGE LOANS JUNE 1, 1997 JUNE 1, 1997
---------------------- -------------- ----------------- ------------------- -------------
<S> <C> <C> <C> <C>
$0.01- $100,000.00........... 109 13.59% $ 8,459,188 3.27%
100,000.01- 200,000.00........... 287 35.79 42,130,001 16.28
200,000.01- 300,000.00........... 142 17.71 34,582,482 13.37
300,000.01- 400,000.00........... 87 10.85 30,865,975 11.93
400,000.01- 500,000.00........... 58 7.23 25,874,338 10.00
500,000.01- 600,000.00........... 25 3.12 13,789,613 5.33
600,000.01- 700,000.00........... 16 2.00 10,564,277 4.08
700,000.01- 800,000.00........... 13 1.62 9,750,633 3.77
800,000.01- 900,000.00........... 14 1.75 11,945,473 4.62
900,000.01- 1,000,000.00........... 11 1.37 10,444,166 4.04
1,000,000.01- 1,100,000.00........... 4 0.50 4,144,549 1.60
1,100,000.01- 1,200,000.00........... 6 0.75 6,864,439 2.65
1,200,000.01- 1,300,000.00........... 3 0.37 3,703,507 1.43
1,300,000.01- 1,400,000.00........... 6 0.75 8,011,457 3.10
1,400,000.01- 1,500,000.00........... 4 0.50 5,746,419 2.22
1,500,000.01- 1,600,000.00........... 5 0.62 7,810,109 3.02
1,600,000.01- 1,800,000.00........... 4 0.50 6,852,879 2.65
1,800,000.01- 2,000,000.00........... 4 0.50 7,655,771 2.96
2,000,000.01- 2,200,000.00........... 0 0.00 -- 0.00
2,200,000.01 & Above ................ 4 0.50 9,526,437 3.68
--- ------ ------------ ------
Total................................ 802 100.00% $258,721,713 100.00%
=== ====== ============ ======
</TABLE>
Average Principal Balance: $322,595
C-2
<PAGE>
INDICES
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE PRINCIPAL PERCENT BY AGGREGATE
NUMBER OF SPTL NUMBER OF SPTL BALANCE AS OF PRINCIPAL BALANCE AS OF
INDEX MORTGAGE LOANS MORTGAGE LOANS JUNE 1, 1997 JUNE 1, 1997
----- -------------- -------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
Six-Month LIBOR......... 385 48.00% $125,573,389 48.54%
Prime Rate - no term.... 224 27.93 57,609,662 22.27
Treasury Bill - no
term................... 96 11.97 40,475,584 15.64
11th District COFI - no
term................... 97 12.09 35,063,078 13.55
--- ------ ------------ ------
Total:.................. 802 100.00% $258,721,713 100.00%
=== ====== ============ ======
</TABLE>
NOTE MARGINS
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE PRINCIPAL PERCENT BY AGGREGATE
NUMBER OF SPTL NUMBER OF SPTL BALANCE AS OF PRINCIPAL BALANCE AS OF
NOTE MARGIN MORTGAGE LOANS MORTGAGE LOANS JUNE 1, 1997 JUNE 1, 1997
----------- -------------- -------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
No margin 0 0.00% $ -- 0.00%
0.001 - 2.500........... 17 2.12 16,053,596 6.20
2.501 - 3.000........... 65 8.10 20,188,675 7.80
3.001 - 3.500........... 140 17.46 43,648,945 16.87
3.501 - 4.000........... 274 34.16 86,893,161 33.59
4.001 - 4.500........... 145 18.08 52,632,739 20.34
4.501 - 5.000........... 141 17.58 30,942,794 11.96
5.001 - 5.500........... 15 1.87 6,365,421 2.46
5.501 - 6.000........... 4 0.50 1,649,013 0.64
6.0001 & Above.......... 1 0.12 347,369 0.13
--- ------ ------------ ------
Total:.................. 802 100.00% $258,721,713 100.00%
=== ====== ============ ======
</TABLE>
MINIMUM MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
MINIMUM PERCENT BY AGGREGATE PRINCIPAL PERCENT BY AGGREGATE
MORTGAGE NUMBER OF SPTL NUMBER OF SPTL BALANCE AS OF PRINCIPAL BALANCE AS OF
INTEREST RATE MORTGAGE LOANS MORTGAGE LOANS JUNE 1, 1997 JUNE 1, 1997
------------- -------------- -------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
No Minimum.............. 1 0.12% $ 747,263 0.29%
0.0000 - 3.500........ 0 0.00 -- 0.00
3.5001 - 4.500........ 11 1.37 1,706,830 0.66
4.5001 - 5.500........ 13 1.62 3,214,453 1.24
5.5001 - 6.500........ 16 2.00 3,025,802 1.17
6.5001 - 7.500........ 279 34.79 115,419,899 44.61
7.5001 - 8.500........ 271 33.79 82,896,815 32.04
8.5001 - 9.500........ 120 14.96 34,282,041 13.25
9.5001 - 10.500........ 41 5.11 9,982,876 3.86
10.5001 - 11.500........ 14 1.75 3,630,289 1.40
11.5001 - 12.500........ 21 2.62 2,359,973 0.91
12.5001 - 13.500........ 9 1.12 1,031,522 0.40
13.5001 - 14.500........ 5 0.62 405,556 0.16
14.5001 & Above......... 1 0.12 18,394 0.01
--- ------ ------------ ------
Total:.................. 802 100.00% $258,721,713 100.00%
=== ====== ============ ======
</TABLE>
C-3
<PAGE>
MAXIMUM MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
MAXIMUM PERCENT BY AGGREGATE PRINCIPAL PERCENT BY AGGREGATE
MORTGAGE NUMBER OF SPTL NUMBER OF SPTL BALANCE AS OF PRINCIPAL BALANCE AS OF
INTEREST RATE MORTGAGE LOANS MORTGAGE LOANS JUNE 1, 1997 JUNE 1, 1997
------------- -------------- -------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
No Maximum.............. 1 0.12% $ 747,263 0.29%
0.0000 - 10.000........ 0 0.00 -- 0.00
10.0001 - 11.000........ 1 0.12 888,375 0.34
11.0001 - 12.000........ 2 0.25 1,777,827 0.69
12.0001 - 13.000........ 29 3.62 9,082,963 3.51
13.0001 - 14.000........ 345 43.02 138,148,929 53.40
14.0001 - 15.000........ 238 29.68 64,659,057 24.99
15.0001 - 16.000........ 87 10.85 27,822,612 10.75
16.0001 - 17.000........ 49 6.11 8,534,246 3.30
17.0001 - 18.000........ 27 3.37 4,672,183 1.81
18.0001 - 19.000........ 18 2.24 2,088,860 0.81
19.0001 - 20.000........ 3 0.37 254,676 0.10
20.0001 - 21.000........ 0 0.00 -- 0.00
21.0001 & Above......... 2 0.25 44,722 0.02
--- ------ ------------ ------
Total:.................. 802 100.00% $258,721,713 100.00%
=== ====== ============ ======
</TABLE>
NEXT RATE ADJUSTMENT DATE
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE PRINCIPAL PERCENT BY AGGREGATE
NEXT RATE NUMBER OF SPTL NUMBER OF SPTL BALANCE AS OF PRINCIPAL BALANCE AS OF
ADJUSTMENT DATE MORTGAGE LOANS MORTGAGE LOANS JUNE 1, 1997 JUNE 1, 1997
--------------- -------------- -------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
One Month............... 3 0.37% $ 2,277,019 0.88%
Three Months............ 5 0.62 182,491 0.07
Six Months.............. 778 97.01 254,337,281 98.31
One Year................ 16 2.00 1,924,922 0.74
--- ------ ------------ ------
Total:.................. 802 100.00% $258,721,713 100.00%
=== ====== ============ ======
</TABLE>
C-4
<PAGE>
LOAN SEASONING
<TABLE>
<CAPTION>
PERCENT BY AGGREGATE PRINCIPAL PERCENT BY AGGREGATE
NUMBER OF SPTL NUMBER OF SPTL BALANCE AS OF PRINCIPAL BALANCE AS OF
NUMBER OF YEARS MORTGAGE LOANS MORTGAGE LOANS JUNE 1, 1997 JUNE 1, 1997
--------------- -------------- -------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
<1 Year.............. 52 6.48% $ 17,446,419 6.74%
1 - 2 Years............. 448 55.86 152,823,754 59.07
2 - 3 Years............. 65 8.10 26,418,930 10.21
3 - 4 Years............. 54 6.73 14,203,580 5.49
4 - 5 Years............. 33 4.11 7,730,740 2.99
5 - 6 Years............. 26 3.24 4,287,204 1.66
6 - 7 Years............. 20 2.49 2,442,059 0.94
7 - 8 Years............. 10 1.25 1,131,989 0.44
8 - 9 Years............. 46 5.74 20,109,058 7.77
9 -10 Years............. 27 3.37 9,376,269 3.62
>10 Years............. 21 2.62 2,751,711 1.06
--- ------ ------------ ------
Total:.................. 802 100.00% $258,721,713 100.00%
=== ====== ============ ======
</TABLE>
156 of the Mortgage Loans, representing 18.32% of the Mortgage Loans, are
Balloon Mortgage Loans. The weighted average original term to maturity for the
Balloon Mortgage Loans is 150 months. The weighted average remaining term to
maturity for the Balloon Mortgage Loans is 76 months. The weighted average
remaining amortization term for the Balloon Mortgage Loans is 269 months. The
remaining amortization term of a Balloon Mortgage Loan represents the number
of months required to fully amortize the principal balance of each Balloon
Mortgage Loan, as of June 1, 1997.
Approximately [ ]% of the SPTL Mortgage Loans provide that if the related
mortgagor prepays the principal balance thereof in an amount in excess of 20%
of the original principal balance of the related Mortgage Loan for any 12-
month period during a certain period of time following origination (the
"Prepayment Premium Period"), such mortgagor will be required to pay a
prepayment premium equal to six months' interest at the Mortgage Interest Rate
then in effect for such Mortgage Loan on the amount of such prepayment in
excess of 20% of the original principal amount thereof (a "Prepayment
Premium"). The following table sets forth the approximate months remaining in
the Prepayment Premium Period of the Mortgage Loans. Any net Prepayment
Premium collected will be distributed solely to the holders of the Class A1X,
Class DX and Class NRX Certificates.
C-5
<PAGE>
CERTAIN CHARACTERISTICS OF THE TOP 50 SPTL MORTGAGE LOANS AS OF THE CUT-OFF
DATE
<TABLE>
<CAPTION>
LOAN ZIP PROPERTY YEAR UNITS/ APPRAISAL APPRAISAL MATURITY ORIGINAL CUT-OFF INTEREST OCCUPANCY
NUMBER ADDRESS CITY STATE CODE TYPE BUILT SF(1) VALUE DATE LTV DATE LTV(2) BALANCE BALANCE RATE RATE
- ------ ------- ---- ----- ---- -------- ----- ------ --------- --------- --- ----------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- ----
(1) Units/square feet represents the number of multifamily, mobile home park,
and self storage properties and square feet for all other properties.
(2) The Maturity Date LTV Ratio is a fraction, calculated as a percentage, the
numerator of which is the Balloon Payment and the denominator of which is
the appraised value of the related Mortgaged Property as determined by an
appraisal thereof generally obtained in connection with the origination of
such Mortgage Loan.
C-6
<PAGE>
CERTAIN CHARACTERISTICS OF THE TOP 50 SPTL MORTGAGE LOANS AS OF THE
CUT-OFF DATE
<TABLE>
<CAPTION>
MAXIMUM
LOAN REMAINING REMAINING FIRST MATURITY YEAR OF NOI MORTGAGE
NUMBER P&I TERM AMORT TERM PAYMENT DATE DATE NOI DETERMINATION DSCR INDEX MARGIN PERIODIC CAP INTEREST RATE
- ------ --- --------- ---------- ------------ -------- --- ------------- ---- ----- ------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
MINIMUM RATE AND
MORTGAGE PAYMENT NEXT RATE LOAN
INTEREST RATE RESET FREQ CHANGE DATE PURPOSE(1)
- ------------- ---------- ----------- ----------
<S> <C> <C> <C>
</TABLE>
- ----
(1) Includes cash-out refinancing.
C-7
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS,
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY
THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAW-
FUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IM-
PLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSE-
QUENT TO THE DATE HEREOF.
------------
SUMMARY TABLE OF CONTENTS
------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Organization and Relationships............................................ 12
Risk Factors.............................................................. 13
Operating Policies and Objectives......................................... 29
Management of Operations.................................................. 43
The Company............................................................... 51
Distribution Policy....................................................... 53
Yield Considerations Related to the Company's Investments................. 53
Initial Investments....................................................... 57
Yield Considerations Related to the Initial MBS Interests................. 67
Servicing of Mortgage Loans............................................... 75
Capitalization............................................................ 80
Management's Discussion and Analysis of Liquidity and Capital Resources... 80
Description of Capital Stock.............................................. 81
Certain Provisions of Maryland Law and of ICCMIC's Charter and Bylaws..... 84
Common Stock Available for Future Sale.................................... 86
Federal Income Tax Considerations......................................... 87
ERISA Considerations...................................................... 102
Certain Legal Aspects of Mortgage Loans and Real Property Investments..... 105
Use of Proceeds........................................................... 115
Underwriting.............................................................. 116
Legal Matters............................................................. 118
Experts................................................................... 118
Additional Information.................................................... 118
Glossary of Terms......................................................... 119
Independent Auditor's Report.............................................. F-1
Annex A................................................................... A-1
Annex B................................................................... B-1
Annex C................................................................... C-1
</TABLE>
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SE-
CURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
20,000,000 SHARES
[LOGO OF IMPERIAL CREDIT COMMERCIAL
MORTGGE INVESTMENT CORP.]
COMMON STOCK
------------
PROSPECTUS
------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
JEFFERIES & COMPANY, INC.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than sales commissions) payable by the Registrant in
connection with the issuance and distribution of the Common Shares.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee................................................ $104,545
Blue Sky Fees and Expenses.......................................... 2,000
NASD Filing Fee..................................................... 30,500
The NASDAQ Stock Market Filing Fee.................................. 50,000
Printing and Mailing Fees........................................... *
Counsel Fees and Expenses........................................... *
Accounting Fees and Expenses........................................ *
Miscellaneous....................................................... *
--------
Total........................................................... $ *
========
</TABLE>
- --------
*To be included by amendment
ITEM 31. SALES TO SPECIAL PARTIES
Not Applicable.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
On July 31, 1997, Mark S. Karlan purchased 100 shares of Common Stock of a
purchase price of $15.00 per share pursuant to a Subscription Agreement dated
July 31, 1997 ("Subscription Agreement") executed by Mark S. Karlan in favor
of the Company. Pursuant to the terms of the Subscription Agreement, the
Company has the option to repurchase 100 shares from Mark S. Karlan at any
time at a purchase price of $15.00 per share.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS
ICCMIC's Charter limits the liability of its directors and officers to
ICCMIC and its stockholders to the fullest extent permitted from time to time
by Maryland law. Maryland law presently permits the liability of directors and
officers to a corporation or its stockholders for money damages to be limited,
except (i) to the extent that it is proved that the director or officer
actually received an improper benefit or profit in money property or services
for the amount of the benefit or profit in money, property or services
actually received, or (ii) if a judgment or other final adjudication is
entered in a proceeding based on a finding that the director's or officer's
action, or failure to act, was the result of active and deliberate dishonesty
and was material to the cause of action adjudicated in the proceeding. This
provision does not limit the ability of ICCMIC or its stockholders to obtain
other relief, such as an injunction or rescission.
The Charter and Bylaws require ICCMIC to indemnify and hold harmless and,
without requiring a determination of the ultimate entitlement to
indemnification, pay reasonable expenses in advance of the final disposition
of any proceeding to its present and former directors and officers and certain
other parties to the fullest extent permitted from time to time by Maryland
law. The Maryland General Corporation Law ("MGCL") permits a corporation to
indemnify its directors, officers and certain other parties against judgments,
penalties, fines, settlements and reasonable expenses incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service to or at the request of the corporation, unless it is
established that (i) the act or omission of the indemnified party was material
to the matter giving rise to the proceeding and (x) was committed in bad faith
or (y) was the result of active and deliberate dishonesty, (ii) the
indemnified party
II-1
<PAGE>
actually received an improper personal benefit in money, property or services
or (iii) in the case of any criminal proceeding, the indemnified party had
reasonable cause to believe that the act or omission was unlawful.
Indemnification may be made against judgments, penalties, fines, settlements
and reasonable expenses actually incurred by the director or officer in
connection with the proceeding. Indemnification is limited to court ordered
reimbursement for expenses; however, if the proceeding is one by or in the
right of the corporation, and the director or officer was adjudged to be
liable to the corporation or if the proceeding is one charging improper
personal benefit to the director or officer and the director or officer was
adjudged to be liable on the basis that personal benefit was improperly
received. The termination of any proceeding by conviction, or upon a plea of
nolo contendere or its equivalent, or an entry of any order of probation prior
to judgment, creates a rebuttal presumption that the director or officer did
not meet the requisite standard of conduct required for indemnification to be
permitted. Maryland law requires a corporation (unless its charter provides
otherwise, which ICCMIC's Charter does not) to indemnify a director or officer
who has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. It is the position of the Securities and Exchange Commission that
indemnification of directors and officers for liabilities arising under the
Securities Act is against public policy and is unenforceable pursuant to
Section 14 of the Securities Act.
The Registrant will carry an insurance policy providing directors' and
officers' liability insurance for any liability its directors or officers or
the directors or officers of any of its subsidiaries may incur in their
capacities as such.
The Registrant will indemnify Imperial Credit Asset Management Corporation,
a California corporation (the "Manager"), and its officers and directors from
any action or claim brought or asserted by any party by reason of any
allegation that the Manager or one or more of its officers or directors
otherwise is accountable or liable for the debts or obligations of the
Registrant or its affiliates. In addition, the Manager and its officers and
directors will not be liable to the Registrant, and the Registrant will
indemnify the Manager and its officers and directors for acts performed
pursuant to the Management Agreement, filed as Exhibit 10.1 hereto, except for
claims arising from acts constituting bad faith, willful misconduct, gross
negligence or reckless disregard of their duties under the Management
Agreement.
The form of Underwriting Agreement filed as an exhibit to this registration
statement provides for the reciprocal indemnifications by the Underwriters of
Registrant, and its directors, officers and controlling persons, and by the
Registrant of the Underwriters, and their respective directors, officers and
controlling persons, against certain liabilities under the Securities Act.
ITEM 34. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED
Not Applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
(a) Index to Financial Statements.
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report.............................................. F-1
Balance Sheet as of July 31, 1997......................................... F-2
Notes to Balance Sheet.................................................... F-3
</TABLE>
II-2
<PAGE>
(b) Exhibits.
<TABLE>
<CAPTION>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Charter of the Registrant.
3.2 Form of Bylaws of the Registrant.
4.1* Form of Common Stock Certificate.
5.1* Opinion of Sonnenschein Nath & Rosenthal.
8.1* Opinion of Sonnenschein Nath & Rosenthal as to Tax Matters.
10.1 Form of Management Agreement.
10.2* Form of Stock Option Plan.
Form of Mortgage Loan Sale and Servicing Agreement between SPTL and the
10.3* Company
10.4* Sale Agreement for purchase of other Initial Investments between
Imperial Credit and the Company
21.1* List of Subsidiaries of Registrant.
Consent of Sonnenschein Nath & Rosenthal (included in Exhibits 5.1 and
23.1* 8.1).
23.2* Consent of Piper & Marbury LLP
23.3 Consent of KPMG Peat Marwick LLP
24.1 Powers of Attorney (included on Signature Page).
</TABLE>
- --------
*To be filed by amendment.
ITEM 36. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issues.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Los Angeles, State of California, on the 31st day of
July, 1997.
Imperial Credit Commercial Mortgage
Investment Corp.,
a Maryland corporation
(Registrant)
/s/ Mark S. Karlan
By: _________________________________
Mark S. Karlan
President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Mark S. Karlan his true and lawful attorney-in-fact and agent, with full
powers of substitution, for him and in his name, place and stead, in any and
all capacities, to sign and to file any and all amendments, including post-
effective amendments and any registration statements filed pursuant to Rule
462(b), to this Registration Statement with the Securities and Exchange
Commission, granting to said attorney-in-fact power and authority to perform
any other act on behalf of the undersigned required to be done in connection
therewith.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on the 31st
day of July, 1997, in the capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ H. Wayne Snavely Director, Chairman
- ------------------------------------- of the Board of
H. Wayne Snavely Directors
/s/ Kevin E. Villani Director, Vice
- ------------------------------------- Chairman of the
Kevin E. Villani Board of Directors
/s/ Mark S. Karlan Director, President
- ------------------------------------- and Chief Executive
Mark S. Karlan Officer
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Charter of the Registrant.
3.2 Form of Bylaws of the Registrant.
4.1* Form of Common Stock Certificate.
5.1* Opinion of Sonnenschein Nath & Rosenthal.
8.1* Opinion of Sonnenschein Nath & Rosenthal as to Tax Matters.
10.1 Form of Management Agreement.
10.2* Form of Stock Option Plan.
Form of Mortgage Loan Sale and Servicing Agreement between SPTL and the
10.3* Company
10.4* Sale Agreement for purchase of other Initial Investments between
Imperial Credit and the Company
21.1* List of Subsidiaries of Registrant.
Consent of Sonnenschein Nath & Rosenthal (included in Exhibits 5.1 and
23.1* 8.1).
23.2* Consent of Piper & Marbury LLP
23.3 Consent of KPMG Peat Marwick LLP
24.1 Powers of Attorney (included on Signature Page).
</TABLE>
- --------
*To be filed by amendment.
<PAGE>
EXHIBIT 3.1
IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
ARTICLES OF INCORPORATION
The undersigned, being a natural person and acting as an incorporator,
does hereby adopt the following Articles of Incorporation for the purpose of
forming a business corporation in the State of Maryland, pursuant to the
provisions of the Maryland General Corporation Law. These Articles of
Incorporation, as they may be amended, supplemented or restated from time to
time, are referred to as the "Charter."
ARTICLE I
INCORPORATOR
The undersigned, James J. Winn, Jr., whose address is c/o Piper & Marbury
L.L.P., 36 South Charles Street, Baltimore, Maryland 21201, being at least 18
years of age, does hereby form a corporation under the general laws of the State
of Maryland.
ARTICLE II
NAME
The name of the corporation (the "Corporation") is:
Imperial Credit Commercial Mortgage Investment Corp.
ARTICLE III
PURPOSE
The purpose for which the Corporation is formed is to engage in any
lawful act or activity including, without limitation or obligation, engaging in
business as a real estate investment trust ("REIT") under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended, or any successor statute
(the "Code") for which corporations may be organized under the general laws of
the State of Maryland as now or hereafter in force.
<PAGE>
ARTICLE IV
PRINCIPAL OFFICE IN STATE AND RESIDENT AGENT
The address of the principal office of the Corporation in the State of
Maryland is c/o The Prentice-Hall Corporation System Maryland, 11 East Chase
Street, Baltimore, Maryland 21202. The name and address of the resident agent of
the Corporation in the State of Maryland is The Prentice-Hall Corporation System
Maryland, 11 East Chase Street, Baltimore, Maryland 21202. The resident agent is
a Maryland corporation.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
Section 5.1 Number of Directors.
-------------------
5.1.1 Number of Directors. The business and affairs of the Corporation
-------------------
shall be managed under the direction of the Board of Directors. The number of
directors of the Corporation shall be three. The number of directors may be
increased or decreased pursuant to the Bylaws, but shall never be less than the
minimum number required by the General Laws of the State of Maryland now or
hereafter in force. The names of the directors who shall serve until the first
annual meeting of stockholders and until their successors are elected and
qualified are H. Wayne Snavely, Kevin E. Villani and Mark S. Karlan.
5.1.2 Election by Preferred Stockholders. Whenever the holders of any
----------------------------------
one or more series of preferred stock of the Corporation shall have the right,
voting separately as a class, to elect one or more directors of the Corporation,
the Board of Directors shall consist of said directors so elected in addition to
the number of directors fixed as provided in paragraph 5.1.1 of this Article V
or in the Bylaws. Notwithstanding the foregoing, and except as otherwise may be
required by law, whenever the holders of any one or more series of preferred
stock of the Corporation shall have the right, voting separately as a class, to
elect one or more directors of the Corporation, the terms of the director or
directors elected by such holders shall expire at the next succeeding annual
meeting of stockholders.
Section 5.2 Independent Board of Directors.
------------------------------
5.2.1 Independent Majority. Notwithstanding anything herein to
--------------------
the contrary,
-2-
<PAGE>
at all times from and after the first annual meeting of stockholders (except
during a period not to exceed sixty (60) days following the death, resignation,
incapacity or removal from office of a director prior to expiration of the
director's term of office), a majority of the Board of Directors shall be
"Independent Directors." "Independent Director" shall mean any director who (a)
does not own greater than a de minimis interest in the "Manager" (as defined
below) or any of its "Affiliates," (as defined below), or (b) within the last
two years has not directly or indirectly (i) been employed by the Manager or any
of its Affiliates, (ii) been an officer or director of the Manager or any of its
Affiliates, (iii) performed services for the Manager or (iv) had any material
business or professional relationship with the Manager or any of its Affiliates.
5.2.2 Manager. The term "Manager" means the Person engaged by the
-------
Corporation pursuant to a Management Agreement (as that term is defined in
Section 5.12) to advise the Board of Directors and be responsible for directing
day-to-day business affairs of the Corporation, including any Person to which
the Person so engaged subcontracts substantially all such functions.
5.2.3 Affiliate. "Affiliate" of a Person shall mean (i) any
---------
Person directly or indirectly owning, controlling, or holding, with power to
vote, ten percent or more of the outstanding voting securities of such other
Person, (ii) any Person ten percent or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or held, with power to
vote, by such other Person, (iii) any Person directly or indirectly controlling,
controlled by, or under common control with such other Person, (iv) any
executive officer, director, trustee or general partner of such other Person,
and (v) any legal entity for which such Person acts as an executive officer,
director, trustee or general partner.
5.2.4 Indirect Relationship. For the purposes of this Section
---------------------
5.2, an indirect relationship shall include circumstances in which a director's
spouse, children, parents, siblings or mothers-, fathers-, sisters-or brothers-
in-law is or has been associated with the Manager or any of its Affiliates.
5.2.5 Business Relationship. For the purposes of this Section
---------------------
5.2, a business relationship is material per se if the gross revenue derived by
the potential director from the Manager and its Affiliates exceeds 5% of his or
her (i) annual gross revenue from all sources in either of the last two years
and (ii) net worth, on a fair market value basis.
5.2.6 Person. "Person" means and includes any natural person,
------
corporation, partnership, association, trust, limited liability company or any
other legal entity.
Section 5.3 Amendment of Section 5.2. Notwithstanding any other
------------------------
provisions of this Charter or the Bylaws of the Corporation (and notwithstanding
that some lesser percentage may be specified by law, this Charter or the Bylaws
of the Corporation), the provisions of
-3-
<PAGE>
Sections 5.2 and 5.3 shall not be amended, altered, changed or repealed without
the affirmative vote of at least 80% of the members of the Board of Directors
and the affirmative vote of not less than two-thirds of all of the votes
ordinarily entitled to be cast in the election of directors, voting together as
a single class.
Section 5.4 Extraordinary Actions. Notwithstanding any provision of law
---------------------
requiring the authorization of any action by a greater proportion than a
majority of the total number of shares of all classes of capital stock or of the
total number of shares of any class of capital stock, such action shall be valid
and effective if authorized by an affirmative vote of the holders of a majority
of the total number of shares of all classes outstanding and entitled to vote
thereon, except as otherwise provided in this Charter.
Section 5.5 Authorization by Board of Stock Issuance. The Board of
----------------------------------------
Directors may authorize the issuance from time to time of shares of stock of the
Corporation of any class or series, whether now or hereafter authorized, or
securities or rights convertible into shares of its stock of any class or
series, whether now or hereafter authorized, for such consideration as the Board
of Directors may deem advisable (or without consideration in the case of a stock
split or stock dividend), subject to such restrictions or limitations, if any,
as may be set forth in this Charter or the Bylaws.
Section 5.6 Preemptive Rights. No holder of any stock or any other
-----------------
securities of the Corporation, whether now or hereafter authorized, shall have
any preemptive right to subscribe for or purchase any stock or any other
securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or prices and
upon such other terms as the Board of Directors, in its sole discretion, may
fix; and any stock or other securities which the Board of Directors may
determine to offer for subscription may, as the Board of Directors in its sole
discretion shall determine, be offered to the holders of any class, series or
type of stock or other securities at the time outstanding to the exclusion of
the holders of any or all other classes, series or types of stock or other
securities at the time outstanding.
Section 5.7 Indemnification.
---------------
5.7.1 The Corporation shall indemnify and hold harmless and,
without requiring a determination of the ultimate entitlement to
indemnification, pay reasonable expenses in advance of the final disposition of
any proceeding to (A) its present and former directors and officers, whether
serving the Corporation or at its request any other entity, to the full extent
required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law and (B) other employees and agents to such
extent as shall be
-4-
<PAGE>
authorized by the Board of Directors or the Corporation's Bylaws and be
permitted by law. The foregoing rights of indemnification shall not be exclusive
of any other rights to which those seeking indemnification may be entitled. The
Board of Directors may take such action as is necessary to carry out these
indemnification provisions and is expressly empowered to adopt, approve and
amend from time to time such bylaws, resolutions or contracts implementing such
provisions or such further indemnification arrangements as may be permitted by
law.
5.7.2 Any indemnification, or payment of expenses in advance of
the final disposition of any proceeding, shall be made promptly, and in any
event within 60 days, upon the written request of the director or officer
entitled to seek indemnification (the "Indemnified Party"). The right to
indemnification and advances hereunder shall be enforceable by the Indemnified
Party in any court of competent jurisdiction, if (i) the Corporation denies such
request, in whole or in part, or (ii) no disposition thereof is made within 60
days. The Indemnified Party's costs and expenses incurred in connection with
successfully establishing his or her right to indemnification, in whole or in
part, in any such action shall also be reimbursed by the Corporation. It shall
be a defense to any action for advance for expenses that (a) a determination has
been made that the facts then known to those making the determination would
preclude indemnification or (b) the Corporation has not received both (i) an
undertaking as required by law to repay such advances in the event it shall
ultimately be determined that the standard of conduct has not been met and (ii)
a written affirmation by the Indemnified Party of such Indemnified Party's good
faith belief that the standard of conduct necessary for indemnification by the
Corporation has been met.
5.7.3 No amendment of this Charter or repeal of any of its
provisions shall limit or eliminate the right to indemnification provided
hereunder with respect to acts or omissions occurring prior to such amendment or
repeal.
Section 5.8 Determinations by Board. The determination as to any of the
-----------------------
following matters, made in good faith by or pursuant to the direction of the
Board of Directors consistent with this Charter and in the absence of actual
receipt of an improper benefit in money, property or services or active and
deliberate dishonesty established by a court, shall be final and conclusive and
shall be binding upon the Corporation and every holder of shares of its stock:
the amount of the net income of the Corporation for any period and the amount of
assets at any time legally available for the payment of dividends, redemption of
its stock or the payment of other distributions on its stock; the amount of
paid-in surplus, net assets, other surplus, annual or other net profit, net
assets in excess of capital, undivided profits or excess of profits over losses
on sales of assets; the amount, purpose, time of creation, increase or decrease,
alteration or cancellation of any reserves or charges and the propriety thereof
(whether or not any obligation or liability for which such reserves or charges
shall have been created shall have been paid or discharged); the fair value, or
any sale, bid or asked price to
-5-
<PAGE>
be applied in determining the fair value, of any asset owned or held by the
Corporation; any matters relating to the acquisition, holding and disposition of
any assets by the Corporation; whether and to what extent and at what times and
places and under what conditions and regulations the books, accounts and
documents of the Corporation shall be open to the inspection of stockholders,
except as otherwise provided by statute or by the Bylaws and, except as so
provided, no stockholder shall have any right to inspect any book, account or
document of the Corporation unless authorized to do so by resolution of the
Board of Directors.
Section 5.9 REIT Qualification. The Corporation shall seek to elect and
------------------
maintain status as a REIT under the Code. The Board of Directors shall use its
reasonable best efforts to ensure that the Corporation satisfies the
requirements for qualification as a REIT under the Code, including, but not
limited to, the ownership of its outstanding stock, the nature of its assets,
the sources of its income, and the amount and timing of distributions to its
stockholders. The Board of Directors shall take no action to disqualify the
Corporation as a REIT or to otherwise revoke the Corporation's election to be
taxed as a REIT without the affirmative vote of not less than two-thirds of all
of the votes ordinarily entitled to be cast in the election of directors, voting
together as a single class.
Section 5.10 Removal of Directors. Any director, or the entire Board of
--------------------
Directors, may be removed from office at any time, but only for cause and then
only by the affirmative vote of not less than two-thirds of all of the votes
ordinarily entitled to be cast in the election of directors, voting together as
a single class.
Section 5.11 Dissolution. The dissolution of the Corporation shall be
-----------
approved by the affirmative vote of not less than two-thirds of all of the votes
ordinarily entitled to be cast in the election of directors, voting together as
a single class.
Section 5.12 Management Agreements. Subject to such approval of the
---------------------
Independent Directors and other conditions, if any, as may be required by any
applicable statute, rule or regulation, the Board of Directors may engage a
Manager to advise the Board of Directors and be responsible for directing the
day-to-day affairs of the Corporation pursuant to a written agreement (a
"Management Agreement"). The approval of any Management Agreement and the
renewal or termination thereof shall require the affirmative vote of a majority
of the Independent Directors.
Section 5.13 Amendment of Certain Provisions. Notwithstanding any other
-------------------------------
provision of this Charter or the Bylaws of the Corporation, the provisions of
Sections 5.9, 5.10, 5.11, 5.12 and 5.13 shall not be amended, altered, changed
or repealed without the affirmative vote of not less than two-thirds of all of
the votes ordinarily entitled to be cast in the election of directors, voting
together as a single class.
-6-
<PAGE>
ARTICLE VI
STOCK
Section 6.1 Authorized Shares. The total number of shares of stock of
-----------------
all classes which the Corporation has authority to issue is 500,000,000 shares
of capital stock (par value $.0001 per share), amounting in aggregate par value
to $50,000. All of such shares are initially classified as "Common Stock". The
Board of Directors may classify and reclassify any unissued shares of capital
stock by setting or changing in any one or more respects the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption of such shares of
capital stock.
Section 6.2 Common Stock. Subject to Article VII, the following is a
------------
description of the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the Common Stock of the Corporation:
6.2.1 Voting Rights. Each share of Common Stock shall have
-------------
one vote, and, except as otherwise provided in respect of any class of stock
hereafter classified or reclassified, the exclusive voting power for all
purposes shall be vested in the holders of the Common Stock. Shares of Common
Stock shall not have cumulative voting rights.
6.2.2 Dividends. Subject to the provisions of law and any
---------
preferences of any class of stock hereafter classified or reclassified,
dividends, including dividends payable in shares of another class of the
Corporation's stock, may be paid ratably on the Common Stock at such time and in
such amounts as the Board of Directors may deem advisable.
6.2.3 Distribution Upon Dissolution. In the event of any
-----------------------------
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the Common Stock shall be entitled, together with
the holders of any other class of stock hereafter classified or reclassified not
having a preference on distributions in the liquidation, dissolution or winding
up of the Corporation, to share ratably in the net assets of the Corporation
remaining after payment or provision for payment of the debts and other
liabilities of the Corporation and the amount to which the holders of any class
of stock hereafter classified or reclassified having a preference on
distributions in the liquidation, dissolution or winding up of the Corporation
shall be entitled.
Section 6.3 Classification/Reclassification.
-------------------------------
-7-
<PAGE>
6.3.1 Powers of the Board of Directors. Subject to Article VII
--------------------------------
and the foregoing, the power of the Board of Directors to classify and
reclassify any of the shares of capital stock shall include, without limitation,
subject to the provisions of this Charter, authority to classify or reclassify
any unissued shares of such stock into a class or classes of preferred stock,
preference stock, special stock or other stock, and to divide and classify
shares of any class into one or more series of such class, by determining,
fixing, or altering one or more of the following:
(a) The distinctive designation of such class or series and
the number of shares to constitute such class or series; provided that, unless
otherwise prohibited by the terms of such or any other class or series, the
number of shares of any class or series may be decreased by the Board of
Directors in connection with any classification or reclassification of unissued
shares and the number of shares of such class or series may be increased by the
Board of Directors in connection with any such classification or
reclassification, and any shares of any class or series which have been
redeemed, purchased, otherwise acquired or converted into shares of Common Stock
or any other class or series shall become part of the authorized capital stock
and be subject to classification and reclassification as provided in this sub-
paragraph.
(b) Whether or not and, if so, the rates, amounts and times
at which, and the conditions under which, dividends shall be payable on shares
of such class or series, whether any such dividends shall rank senior or junior
to or on a parity with the dividends payable on any other class or series of
stock, and the status of any such dividends as cumulative, cumulative to a
limited extent or non-cumulative and as participating or non-participating.
(c) Whether or not shares of such class or series shall
have voting rights, in addition to any voting rights provided by law and, if so,
the terms of such voting rights.
(d) Whether or not shares of such class or series shall
have conversion or exchange privileges and, if so, the terms and conditions
thereof, including provision for adjustment of the conversion or exchange rate
in such events or at such times as the Board of Directors shall determine.
(e) Whether or not shares of such class or series shall be
subject to redemption and, if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be redeemable and the
amount per share payable in case of redemption, which amount may vary under
different conditions and at different redemption dates; and whether or not there
shall be any sinking fund or purchase account in respect thereof, and if so, the
terms thereof.
-8-
<PAGE>
(f) The rights of the holders of shares of such class or
series upon the liquidation, dissolution or winding up of the affairs of, or
upon any distribution of the assets of, the Corporation, which rights may vary
depending upon whether such liquidation, dissolution or winding up is voluntary
or involuntary and, if voluntary, may vary at different dates, and whether such
rights shall rank senior or junior to or on a parity with such rights of any
other class or series of stock.
(g) Whether or not there shall be any limitations
applicable, while shares of such class or series are outstanding, upon the
payment of dividends or making of distributions on, or the acquisition of, or
the use of moneys for purchase or redemption of, any stock of the Corporation,
or upon any other action of the Corporation, including action under this sub-
paragraph, and, if so, the terms and conditions thereof.
(h) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such class or
series, not inconsistent with law and this Charter.
6.3.2 Ranking. For the purposes hereof and of any articles
-------
supplementary to this Charter providing for the classification or
reclassification of any shares of capital stock or of any other Charter document
of the Corporation (unless otherwise provided in any such articles or document),
any class or series of stock of the Corporation shall be deemed to rank:
(a) prior to another class or series either as to dividends
or upon liquidation, if the holders of such class or series shall be entitled to
the receipt of dividends or of amounts distributable on liquidation, dissolution
or winding up, as the case may be, in preference or priority to holders of such
other class or series;
(b) on a parity with another class or series either as to
dividends or upon liquidation, whether or not the dividend rates, dividend
payment dates or redemption or liquidation price per share thereof be different
from those of such others, if the holders of such class or series of stock shall
be entitled to receipt of dividends or amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in proportion to their respective
dividend rates or redemption or liquidation prices, without preference or
priority over the holders of such other class or series; and
(c) junior to another class or series either as to
dividends or upon liquidation, if the rights of the holders of such class or
series shall be subject or subordinate to the rights of the holders of such
other class or series in respect of the receipt of dividends or the amounts
distributable upon liquidation, dissolution or winding up, as the case may be.
Section 6.4 Charter and Bylaws. All persons who shall acquire stock in
------------------
the
-9-
<PAGE>
Corporation shall acquire the same subject to the provisions of this Charter and
the Bylaws of the Corporation.
ARTICLE VII
Section 7.1 Restrictions on Transfer.
------------------------
7.1.1 Definitions. For purposes of this Article VII, the
-----------
following terms shall have the following meanings:
(a) "Beneficial Ownership" shall mean ownership of shares
of Equity Stock by a Person who would be treated as an owner of such shares of
Equity Stock either directly or indirectly through the application of Section
544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms
"Beneficial Owner," "Beneficially Owns," and "Beneficially Owned" shall have
correlative meanings.
(b) "Beneficiary" shall mean, with respect to any Trust,
one or more organizations described in each of Section 170(b)(1)(A) (other than
clauses (vii) or (viii) thereof) and Section 170(c)(2) of the Code that are
named by the Corporation as the beneficiary or beneficiaries of such Trust, in
accordance with the provisions of Section 7.2.1.
(c) "Board of Directors" shall mean the Board of Directors
of the Corporation.
(d) "Closing Price" on any date shall mean the average of
the high bid and low asked prices in the over-the-counter market, as reported by
The Nasdaq Stock Market, or, if such system is no longer in use, the principal
other automated quotations system that may then be in use or, if the shares of
Equity Stock are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the shares of Equity Stock selected by the Board of Directors.
(e) "Constructive Ownership" shall mean ownership of shares
of Equity Stock by a Person who would be treated as an owner of such shares of
Equity Stock either directly or indirectly through the application of Section
318 of the Code, as modified by Section 856(d)(5) of the Code. The terms
"Constructive Owner," "Constructively Owns," and "Constructively Owned" shall
have correlative meanings.
(f) "Disqualified Person" means (A) the United States, any
State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of any of the
foregoing, (B) any organization (other than a cooperative described in Section
521 of the Code) which is exempt from tax unless such
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<PAGE>
organization is subject to the tax imposed by Section 511 of the Code, and (c)
any organization described in Section 1381 (a) (2) (c) of the Code.
(g) "Equity Stock" shall mean the Common Stock and the
preferred stock of the Corporation, including the Common Stock and the preferred
stock of the Corporation that are held as Shares-in-Trust in accordance with the
provisions of Section 7.2.
(h) "Initial Public Offering" means the sale of shares of
Common Stock pursuant to the Corporation's first effective registration
statement for such shares of Common Stock filed under the Securities Act of
1933, as amended.
(i) "Market Price" on any date shall mean the average of
the Closing Price for the five consecutive Trading Days ending on such date.
(j) "Non-Transfer Event" shall mean an event other than a
purported Transfer that would cause any Person to Beneficially Own or
Constructively Own shares of Equity Stock in excess of the Ownership Limit,
including, but not limited to, the granting of any option or entering into any
agreement for the sale, transfer or other disposition of shares of Equity Stock
or the sale, transfer, assignment or other disposition of any securities or
rights convertible into or exchangeable for shares of Equity Stock.
(k) "Ownership Limit" shall mean the restriction on
ownership (or deemed ownership by virtue of the attribution provisions of the
Code) of more than 9.9% of the outstanding shares of Common Stock or any series
of preferred stock by any stockholder.
(l) "Permitted Transferee" shall mean any Person designated
as a Permitted Transferee in accordance with the provisions of Section 7.2.5.
(m) "Person" shall mean an individual, corporation,
partnership, estate, trust, a portion of a trust permanently set aside for or to
be used exclusively for the purposes described in Section 642(c) of the Code,
association, private foundation within the meaning of Section 509(a) of the
Code, joint stock company or other entity and also includes a "group" as that
term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of
1934, as amended.
(n) "Prohibited Owner" shall mean, with respect to any
purported Transfer or Non-Transfer Event, any Person who, but for the provisions
of Section 7.1.3, would own record title to shares of Equity Stock.
(o) "Restriction Termination Date" shall mean the first day
after the date of the Initial Public Offering on which (i) the Board of
Directors determines that it is no longer
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<PAGE>
in the best interests of the Corporation to attempt to, or continue to, qualify
as a REIT and (ii) there is an affirmative vote of not less than two-thirds of
all of the votes ordinarily entitled to be cast in the election of directors,
voting together as a single class.
(p) "Shares-in-Trust" shall mean any shares of Equity Stock
designated Shares-in-Trust pursuant to Section 7.1.3.
(q) "Trading Day" shall mean any day other than a Saturday,
a Sunday or a day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
(r) "Transfer" (as a noun) shall mean any sale, transfer,
gift, assignment, devise or other disposition of shares of Equity Stock, whether
voluntary or involuntary, whether of record, constructively or beneficially and
whether by operation of law or otherwise. "Transfer" (as a verb) shall not have
the correlative meaning.
(s) "Trust" shall mean any separate trust created pursuant
to Section 7.1.3 and administered in accordance with the terms of Section 7.2
hereof, for the exclusive benefit of any Beneficiary.
(t) "Trustee" shall mean any Person or entity unaffiliated
with both the Corporation and any Prohibited Owner, such Trustee to be
designated by the Corporation to act as trustee of any Trust, or any successor
trustee thereof.
7.1.2 Restriction on Transfers.
------------------------
(a) Except as provided in Section 7.1.7, from the date of
the Initial Public Offering and prior to the Restriction Termination Date, (i)
no Person shall Beneficially Own or Constructively Own outstanding shares of
Equity Stock in excess of the Ownership Limit and (ii) any Transfer that, if
effective, would result in any Person Beneficially Owning or Constructively
Owning shares of Equity Stock in exces s of the Ownership Limit shall be void ab
--
initio as to the Transfer of that number of shares of Equity Stock which would
- ------
be otherwise Beneficially Owned or Constructively Owned by such Person in excess
of the Ownership Limit, and the intended transferee shall acquire no rights in
such excess shares of Equity Stock.
(b) Except as provided in Section 7.1.7, from the date of
the Initial Public Offering and prior to the Restriction Termination Date, any
Transfer that, if effective, would result in shares of Equity Stock being
beneficially owned by fewer than 100 Persons (determined without reference to
any rules of attribution) shall be void ab initio as to the Transfer of that
---------
number of shares which would be otherwise beneficially owned (determined
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<PAGE>
without reference to any rules of attribution) by the transferee, and the
intended transferee shall acquire no rights in such shares of Equity Stock.
(c) From the date of the Initial Public Offering and prior
to the Restriction Termination Date, any Transfer of shares of Equity Stock
that, if effective, would result in the Corporation being "closely held" within
the meaning of Section 856(h) of the Code shall be void ab initio as to the
---------
Transfer of that number of shares of Equity Stock which would cause the
Corporation to be "closely held" within the meaning of Section 856(h) of the
Code, and the intended transferee shall acquire no rights in such shares of
Equity Stock.
(d) From the date of the Initial Public Offering and prior
to the Restriction Termination Date, any Transfer of shares of Equity Stock
that, if effective, would cause the Corporation to Constructively Own 10% or
more of the ownership interests in a tenant of the Corporation's real property,
within the meaning of Section 856(d)(2)(B) of the Code, shall be void ab initio
---------
as to the Transfer of that number of shares of Equity Stock which would cause
the Corporation to Constructively Own 10% or more of the ownership interests in
a tenant of the Corporation's real property, within the meaning of Section
856(d)(2)(B) of the Code, and the intended transferee shall acquire no rights in
such excess shares of Equity Stock.
(e) From the date of the Initial Public Offering and prior
to the Restriction Termination Date, any Transfer of Shares of Equity Stock
that, if effective, would result in shares of Equity Stock being beneficially
owned by a Disqualified Person shall be void ab initio as to the Transfer of
---------
that number of shares which would be otherwise beneficially owned by the
transferee, and the intended transferee shall acquire no rights in such shares
of Equity Stock.
7.1.3 Transfer to Trust.
-----------------
(a) If, notwithstanding the other provisions contained in
this Section 7.1, at any time after the Initial Public Offering and prior to the
Restriction Termination Date, there is a purported Transfer or Non-Transfer
Event such that any Person would either Beneficially Own or Constructively Own
shares of Equity Stock in excess of the Ownership Limit, then, (i) except as
otherwise provided in Section 7.1.7, the purported transferee shall acquire no
right or interest (or, in the case of a Non-Transfer Event, the Person holding
record title to the shares of Equity Stock Beneficially Owned or Constructively
Owned by such Beneficial Owner or Constructive Owner, shall cease to own any
right or interest) in such number of shares of Equity Stock which would cause
such Beneficial Owner or Constructive Owner to Beneficially Own or
Constructively Own shares of Equity Stock in excess of the Ownership Limit, (ii)
such number of shares of Equity Stock in excess of the Ownership Limit (rounded
up to the nearest whole share) shall be designated Shares-in-Trust and, in
accordance with the provisions of Section 7.2 hereof, transferred automatically
and by operation of law to
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<PAGE>
the Trust to be held in accordance with that Section 7.2, and (iii) the
Prohibited Owner shall submit such number of shares of Equity Stock to the
Corporation for registration in the name of the Trustee. Such transfer to a
Trust and the designation of shares as Shares-in-Trust shall be effective as of
the close of business on the business day prior to the date of the Transfer or
Non-Transfer Event, as the case may be.
(b) If, notwithstanding the other provisions contained in
this Section 7.1, at any time after the Initial Public Offering and prior to the
Restriction Termination Date, there is a purported Transfer or Non-Transfer
Event that, if effective, would (i) result in the shares of Equity Stock being
beneficially owned by fewer than 100 Persons (determined without reference to
any rules of attribution), (ii) result in the Corporation being "closely held"
within the meaning of Section 856(h) of the Code, (iii) result in the shares of
Equity Stock being beneficially owned by a Disqualified Person, or (iv) cause
the Corporation to Constructively Own 10% or more of the ownership interests in
a tenant of the Corporation's real property, within the meaning of Section
856(d)(2)(B) of the Code, then (x) the purported transferee shall not acquire
any right or interest (or, in the case of a Non-Transfer Event, the Person
holding record title of the shares of Equity Stock with respect to which such
Non-Transfer Event occurred, shall cease to own any right or interest) in such
number of shares of Equity Stock, the ownership of which by such purported
transferee or record holder would (A) result in the shares of Equity Stock being
beneficially owned by fewer than 100 Persons (determined without reference to
any rules of attribution), (B) result in the Corporation being "closely held"
within the meaning of Section 856(h) of the Code, (C) result in the shares of
Equity Stock being beneficially owned by a Disqualified Person, or (D) cause the
Corporation to Constructively Own 10% or more of the ownership interests in a
tenant of the Corporation's real property, within the meaning of Section
856(d)(2)(B) of the Code, (y) such number of shares of Equity Stock (rounded up
to the nearest whole share) shall be designated Shares-in-Trust and, in
accordance with the provisions of Section 7.2, transferred automatically and by
operation of law to the Trust to be held in accordance with that Section 7.2,
and (z) the Prohibited Owner shall submit such number of shares of Equity Stock
to the Corporation for registration in the name of the Trustee. Such transfer to
a Trust and the designation of shares as Shares-in-Trust shall be effective as
of the close of business on the business day prior to the date of the Transfer
or Non-Transfer Event, as the case may be.
7.1.4 Remedies For Breach. If the Corporation, or its designees,
-------------------
shall at any time determine in good faith that a Transfer has taken place in
violation of Section 7.1.2 or that a Person intends to acquire or has attempted
to acquire Beneficial Ownership or Constructive Ownership of any shares of
Equity Stock in violation of Section 7.1.2, the Corporation shall take such
action as it deems advisable to refuse to give effect to or to prevent such
Transfer or acquisition, including, but not limited to, refusing to give effect
to such Transfer on the books of the Corporation or instituting proceedings to
enjoin such Transfer or acquisition.
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<PAGE>
7.1.5 Notice of Restricted Transfer. Any Person who acquires or
-----------------------------
attempts to acquire shares of Equity Stock in violation of Section 7.1.2, or any
Person who owned shares of Equity Stock that were transferred to the Trust
pursuant to the provisions of Section 7.1.2, shall immediately give written
notice to the Corporation of such event and shall provide to the Corporation
such other information as the Corporation may request in order to determine the
effect, if any, of such Transfer or Non-Transfer Event, as the case may be, on
the Corporation's status as a REIT.
7.1.6 Owners Required To Provide Information. From the date of
--------------------------------------
the Initial Public Offering and prior to the Restriction Termination Date:
(a) Every Beneficial Owner or Constructive Owner of more
than 5%, or such lower percentages as required pursuant to regulations under the
Code, of the outstanding shares of all classes of capital stock of the
Corporation shall, within 30 days after January 1 of each year, provide to the
Corporation a written statement or affidavit stating the name and address of
such Beneficial Owner or Constructive Owner, the number of shares of Equity
Stock Beneficially Owned or Constructively Owned, and a description of how such
shares are held. Each such Beneficial Owner or Constructive Owner shall provide
to the Corporation such additional information as the Corporation may request in
order to determine the effect, if any, of such Beneficial Ownership or
Constructive Ownership on the Corporation's status as a REIT and to ensure
compliance with the Ownership Limit.
(b) Each Person who is a Beneficial Owner or Constructive
Owner of shares of Equity Stock and each Person (including the stockholder of
record) who is holding shares of Equity Stock for a Beneficial Owner or
Constructive Owner shall provide to the Corporation a written statement or
affidavit stating such information as the Corporation may request in order to
determine the Corporation's status as a REIT and to ensure compliance with the
Ownership Limit.
7.1.7 Exception. The Ownership Limit shall not apply to the
---------
acquisition of shares of Equity Stock by an underwriter that participates in a
public offering of such shares for a period of 90 days following the purchase by
such underwriter of such shares provided that the restrictions contained in
Section 7.1.2 will not be violated following the distribution by such
underwriter of such shares. In addition, the Board of Directors, upon receipt
of a ruling from the Internal Revenue Service or an opinion of counsel in each
case to the effect that the restrictions contained in Section 7.2.2, Section
7.2.3, and/or Section 7.2.4 hereof will not be violated, may exempt a Person
from the Ownership Limit provided that (i) the Board of Directors obtains such
representations and undertakings from such Person as are reasonably necessary to
ascertain that no individual's Beneficial Ownership or Constructive Ownership of
shares of Equity Stock will violate the Ownership Limit and (ii) such Person
agrees in writing that any violation or attempted violation will result in such
transfer to the Trust of shares of
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<PAGE>
Equity Stock pursuant to Section 7.1.3.
Section 7.2 Shares-in-Trust.
---------------
7.2.1 Trust. Any shares of Equity Stock transferred to a Trust
-----
and designated Shares-in-Trust pursuant to Section 7.1.3 hereof shall be held
for the exclusive benefit of the Beneficiary. The Corporation shall name a
Beneficiary for each Trust within five days after discovery of the existence
thereof. Any transfer to a Trust, and subsequent designation of shares of Equity
Stock as Shares-in-Trust, pursuant to Section 7.1.3 shall be effective as of the
close of business on the business day prior to the date of the Transfer or Non-
Transfer Event that results in the transfer to the Trust. Shares-in-Trust shall
remain issued and outstanding shares of Equity Stock of the Corporation and
shall be entitled to the same rights and privileges on identical terms and
conditions as are all other issued and outstanding shares of Equity Stock of the
same class and series. When transferred to a Permitted Transferee in accordance
with the provisions of Section 7.2.5, such Shares-in-Trust shall cease to be
designated as Shares-in-Trust.
7.2.2 Dividend Rights. The Trust, as record holder of Shares-in-
---------------
Trust, shall be entitled to receive all dividends and distributions as may be
declared by the Board of Directors on such shares of Equity Stock and shall hold
such dividends or distributions in trust for the benefit of the Beneficiary. The
Prohibited Owner with respect to Shares-in-Trust shall repay to the Trust the
amount of any dividends or distributions received by it that (i) are
attributable to any shares of Equity Stock designated Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares became
Shares-in-Trust. The Corporation shall take all measures that it determines
reasonably necessary to recover the amount of any such dividend or distribution
paid to a Prohibited Owner, including, if necessary, withholding any portion of
future dividends or distributions payable on shares of Equity Stock Beneficially
Owned or Constructively Owned by the Person who, but for the provisions of
Section 7.1.3, would Constructively Own or Beneficially Own the Shares-in-Trust;
and, as soon as reasonably practicable following the Corporation's receipt or
withholding thereof, shall pay over to the Trust for the benefit of the
Beneficiary the dividends so received or withheld, as the case may be.
7.2.3 Rights Upon Liquidation. In the event of any voluntary or
-----------------------
involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of, the Corporation, each holder of Shares-in-Trust shall be entitled
to receive, ratably with each other holder of shares of Equity Stock of the same
class or series, that portion of the assets of the Corporation which is
available for distribution to the holders of such class and series of shares of
Equity Stock. The Trust shall distribute to the Prohibited Owner the amounts
received upon such liquidation, dissolution, or winding up, or distribution;
provided, however, that the Prohibited Owner shall not be entitled to receive
amounts pursuant to this Section 7.2.3 in excess of, in
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<PAGE>
the case of a purported Transfer in which the Prohibited Owner gave value for
shares of Equity Stock and which Transfer resulted in the transfer of the shares
to the Trust, the price per share, if any, such Prohibited Owner paid for the
shares of Equity Stock and, in the case of a Non-Transfer Event or Transfer in
which the Prohibited Owner did not give value for such shares (e.g., if the
shares were received through a gift or devise) and which Non-Transfer Event or
Transfer, as the case may be, resulted in the transfer of shares to the Trust,
the price per share equal to the Market Price on the date of such Non-Transfer
Event or Transfer. Any remaining amount in such Trust shall be distributed to
the Beneficiary.
7.2.4 Voting Rights. The Trustee shall be entitled to vote all
-------------
Shares-in-Trust. Any vote by a Prohibited Owner as a holder of shares of Equity
Stock prior to the discovery by the Corporation that the shares of Equity Stock
are Shares-in-Trust shall, subject to applicable law, be rescinded and shall be
void ab initio with respect to such Shares-in-Trust and the Prohibited Owner
-- ------
shall be deemed to have given, as of the close of business on the business day
prior to the date of the purported Transfer or Non-Transfer Event that results
in the transfer to the Trust of shares of Equity Stock under Section 7.1.3, an
irrevocable proxy to the Trustee to vote the Shares-in-Trust in the manner in
which the Trustee, in its sole and absolute discretion, desires.
7.2.5 Designation of Permitted Transferee. The Trustee shall have
-----------------------------------
the exclusive and absolute right to designate a Permitted Transferee of any and
all Shares-in-Trust. In an orderly fashion so as not to materially adversely
affect the Market Price of the Shares-in-Trust, the Trustee shall designate any
Person as Permitted Transferee, provided, however, that (i) the Permitted
Transferee so designated purchases for valuable consideration (whether in a
public or private sale) the Shares-in-Trust and (ii) the Permitted Transferee so
designated may acquire such Shares-in-Trust without such acquisition resulting
in a transfer to a Trust and the redesignation of such shares of Equity Stock so
acquired as Shares-in-Trust under Section 7.1.3. Upon the designation by the
Trustee of a Permitted Transferee in accordance with the provisions of this
Section 7.2.5, the Trustee shall (i) cause to be transferred to the Permitted
Transferee that number of Shares-in-Trust acquired by the Permitted Transferee,
(ii) cause to be recorded on the books of the Corporation that the Permitted
Transferee is the holder of record of such number of shares of Equity Stock,
(iii) cause the Shares-in-Trust to be canceled, and (iv) distribute to the
Beneficiary any and all amounts held with respect to the Shares-in-Trust after
making that payment to the Prohibited Owner pursuant to Section 7.2.6.
7.2.6 Compensation to Record Holder of Shares of Equity Stock
-------------------------------------------------------
that Become Shares-in-Trust. Any Prohibited Owner shall be entitled (following
- ---------------------------
discovery of the Shares-in-Trust and subsequent designation of the Permitted
Transferee in accordance with Section 7.2.5 or following the acceptance of the
offer to purchase such shares in accordance with Section 7.2.7) to receive from
the Trustee following the sale or other disposition of such Shares-in-Trust the
lesser of (i) in the case of (a) a purported Transfer in which the Prohibited
Owner
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<PAGE>
gave value for shares of Equity Stock and which Transfer resulted in the
transfer of the shares to the Trust, the price per share, if any, such
Prohibited Owner paid for the shares of Equity Stock, or (b) a Non-Transfer
Event or Transfer in which the Prohibited Owner did not give value for such
shares (e.g., if the shares were received through a gift or devise) and which
Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of
shares to the Trust, the price per share equal to the Market Price on the date
of such Non-Transfer Event or Transfer, and (ii) the price per share received by
the Trustee from the sale or other disposition of such Shares-in-Trust in
accordance with Section 7.2.5. Any amounts received by the Trustee in respect of
such Shares-in-Trust and in excess of such amounts to be paid the Prohibited
Owner pursuant to this Section 7.2.6 shall be distributed to the Beneficiary in
accordance with the provisions of Section 7.2.5. Each Beneficiary and Prohibited
Owner waive any and all claims that they may have against the Trustee and the
Trust arising out of the disposition of Shares-in-Trust, except for claims
arising out of the gross negligence or willful misconduct of, or any failure to
make payments in accordance with this Section 7.2, by such Trustee or the
Corporation.
7.2.7 Purchase Right in Shares-in-Trust. Shares-in-Trust shall be
---------------------------------
deemed to have been offered for sale to the Corporation, or its designee, at a
price per share equal to the lesser of (i) the price per share in the
transaction that created such Shares-in-Trust (or, in the case of devise, gift
or Non-Transfer Event, the Market Price at the time of such devise, gift or Non-
Transfer Event) and (ii) the Market Price on the date the Corporation, or its
designee, accepts such offer. The Corporation shall have the right to accept
such offer for a period of ninety days after the later of (i) the date of the
Non-Transfer Event or purported Transfer which resulted in such Shares-in-Trust
and (ii) the date the Corporation determines in good faith that a Transfer or
Non-Transfer Event resulting in Shares-in-Trust has occurred, if the Corporation
does not receive a notice of such Transfer or Non-Transfer Event pursuant to
Section 7.1.5.
Section 7.3 Remedies Not Limited. Nothing contained in this Article VII
--------------------
shall limit the authority of the Corporation to take such other action as it
deems necessary or advisable to protect the Corporation and the interests of its
stockholders by preservation of the Corporation's status as a REIT and to ensure
compliance with the Ownership Limit.
Section 7.4 Ambiguity. In the case of an ambiguity in the application of
---------
any of the provisions of this Article VII, including any definition contained in
Section 7.1.1, the Board of Directors shall have the power to determine the
application of the provisions of this Article VII with respect to any situation
based on the facts known to it.
Section 7.5 Legend. From the date of the Initial Public Offering and
------
prior to the Restriction Termination Date, each certificate for shares of Equity
Stock shall bear the following legend:
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<PAGE>
"The shares of [Common or Preferred] Stock represented by
this certificate are subject to restrictions on transfer for the purpose
of the Corporation's maintenance of its status as a real estate
investment trust under the Internal Revenue Code of 1986, as amended (the
"Code"). No Person may (i) Beneficially Own or Constructively Own shares
of Common Stock in excess of 9.9% of the number of outstanding shares of
Common Stock, (ii) Beneficially Own or Constructively Own shares of any
class or series of Preferred Stock in excess of 9.9% of the number of
outstanding shares of such class or series of Preferred Stock, (iii)
beneficially own shares of Equity Stock that would result in the shares
of Equity Stock being beneficially owned by fewer than 100 Persons
(determined without reference to any rules of attribution), (iv)
beneficially own shares of Equity Stock that would result in the shares
of Equity Stock being beneficially owned by (A) the United States, any
State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of any of
the foregoing, (B) any organization (other than a cooperative described
in Section 521 of the Code) which is exempt from tax unless such
organization is subject to the tax imposed by Section 511 of the Code, or
(C) any organization described in Section 1381(a)(2)(C) of the Code, (v)
Beneficially Own shares of Equity Stock that would result in the
Corporation being "closely held" under Section 856(h) of the Code, or
(vi) Constructively Own shares of Equity Stock that would cause the
Corporation to Constructively Own 10% or more of the ownership interests
in a tenant of the Corporation's real property, within the meaning of
Section 856(d)(2)(B) of the Code. Any Person who attempts to Beneficially
Own or Constructively Own shares of Equity Stock in excess of the above
limitations must immediately notify the Corporation in writing. If the
restrictions above are violated, the shares of Equity Stock represented
hereby will be transferred automatically and by operation of law to a
Trust and shall be designated Shares-in-Trust. All capitalized terms in
this legend have the meanings defined in the Corporation's Charter, as
the same may be further amended from time to time, a copy of which,
including the restrictions on transfer, will be sent without charge to
each stockholder who so requests."
Section 7.6 Severability. If any provision of this Article VII or any
------------
application of any such provision is determined to be invalid by any federal or
state court having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
Section 7.7 Exchange Transactions. Nothing in this Article VII shall
---------------------
preclude the
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<PAGE>
settlement of any transaction entered into through the facilities of any
national securities exchange or automated inter-dealer quotation system. The
fact that the settlement of any transaction is so permitted shall not negate the
effect of any other provision of this Article VII and any transferee in such a
transaction shall be subject to all of the provisions and limitations set forth
in this Article VII.
Section 7.8 Enforcement. The Corporation is authorized specifically to
-----------
seek equitable relief, including injunctive relief, to enforce the provisions of
this Article VII.
Section 7.9 Non-Waiver. No delay or failure on the part of the
----------
Corporation or the Board of Directors in exercising any right hereunder shall
operate as a waiver of any right of the Corporation or the Board of Directors,
as the case may be, except to the extent specifically waived in writing.
Section 7.10 Headings of Subdivisions. The headings of the various
------------------------
subdivisions hereof are for convenience of reference only and shall not affect
the interpretation of the provision hereof.
Section 7.11 Amendment. Notwithstanding any other provision of this
---------
Charter or the Bylaws of the Corporation, the provisions of Section 7 shall not
be amended, altered, changed or repealed without the affirmative vote of not
less than two-thirds of all of the votes ordinarily entitled to be cast in the
election of directors, voting together as a single class.
ARTICLE VIII
AMENDMENTS
The Corporation reserves the right from time to time to make any
amendments of this Charter which may now or hereafter be authorized by law,
including any amendments changing the terms or contract rights, as expressly set
forth in this Charter, of any of its outstanding stock by classification,
reclassification or otherwise but, no such amendment which changes such terms or
contract rights of any of its outstanding stock shall be valid unless such
amendment shall have been authorized by not less than a majority of the
aggregate number of the votes entitled to be cast thereon.
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<PAGE>
ARTICLE IX
LIMITATION OF LIABILITY
To the fullest extent permitted by Maryland statutory or decisional law,
as amended or interpreted, no director or officer of the Corporation shall be
personally liable to the Corporation or its stockholders for money damages. No
amendment of this Charter or repeal of any of its provisions shall limit or
eliminate the limitation on liability provided to directors and officers
hereunder with respect to any act or omission occurring prior to such amendment
or repeal.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation
acknowledging the same to be my act, on July ___, 1997
WITNESS:
- ------------------------- ------------------------------
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<PAGE>
EXHIBIT 3.2
ADOPTED JULY 31, 1997
IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
BYLAWS
ARTICLE I
OFFICES
Section 1. PRINCIPAL EXECUTIVE OFFICE. The principal executive office
of the Corporation shall be located at such place or places as the Board of
Directors may designate.
Section 2. ADDITIONAL OFFICES. The Corporation may have additional
offices at such places as the Board of Directors may from time to time determine
or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE. All meetings of stockholders shall be held at the
principal executive office of the Corporation or at such other place within the
United States as shall be stated in the notice of the meeting.
Section 2. ANNUAL MEETING. The Corporation shall hold an annual meeting
of its stockholders to elect directors and transact any other business within
its powers, either at 10:00 a.m. on the twenty-eighth day of August in each year
if not a legal holiday, or at such other time on such other day as shall be set
by the Board of Directors. Except as otherwise provided by the Corporation's
Charter or statute, any business may be considered at an annual meeting without
the purpose of the meeting having been specified in the notice. Failure to hold
an annual meeting does not invalidate the Corporation's existence or affect any
otherwise valid corporate acts.
Section 3. SPECIAL MEETINGS. The president, chief executive officer or
Board of Directors may call special meetings of the stockholders. Special
meetings of stockholders shall also be called by the secretary of the
Corporation upon the written request of the holders of shares entitled to cast
not less than a majority of all the votes entitled to be cast at such meeting.
Such request shall state the purpose of such meeting and the matters proposed to
be acted on at such meeting. The secretary shall inform such stockholders of the
reasonably estimated cost of preparing and mailing notice of the meeting and,
upon payment to the Corporation by such stockholders of such costs,
<PAGE>
the secretary shall give notice to each stockholder entitled to notice of the
meeting.
Section 4. NOTICE. Not less than ten nor more than 90 days before each
meeting of stockholders, the secretary shall give to each stockholder entitled
to vote at such meeting and to each stockholder not entitled to vote who is
entitled to notice of the meeting written or printed notice stating the time and
place of the meeting and, in the case of a special meeting or as otherwise may
be required by any statute, the purpose for which the meeting is called, either
by mail or by presenting it to such stockholder personally or by leaving it at
his residence or usual place of business. If mailed, such notice shall be deemed
to be given when deposited in the United States mail addressed to the
stockholder at his post office address as it appears on the records of the
Corporation, with postage thereon prepaid.
Section 5. SCOPE OF NOTICE. Any business of the Corporation may be
transacted at an annual meeting of stockholders without being specifically
designated in the notice, except such business as is required by any statute to
be stated in such notice. No business shall be transacted at a special meeting
of stockholders except as specifically designated in the notice.
Section 6. ORGANIZATION. At every meeting of stockholders, the chairman
of the board of directors, if there be one, shall conduct the meeting or, in the
case of vacancy in office or absence of the chairman of the board of directors,
one of the following officers present shall conduct the meeting in the order
stated: the chief executive officer, if there be one, the president, the vice
presidents in their order of rank and seniority, or a chairman chosen by the
stockholders entitled to cast a majority of the votes which all stockholders
present in person or by proxy are entitled to cast, shall act as chairman, and
the secretary, or, in his absence, an assistant secretary, or in the absence of
both the secretary and assistant secretaries, a person appointed by the chairman
shall act as secretary.
Section 7. QUORUM. Unless the Corporation's Charter provides otherwise,
at a meeting of stockholders the presence in person or by proxy of stockholders
entitled to cast a majority of all the votes entitled to be cast at the meeting
shall constitute a quorum. Whether or not a quorum is present, a meeting of
stockholders convened on the date for which it was called may be adjourned from
time to time without further notice by a majority vote of the stockholders
present in person or by proxy to a date not more than 120 days after the
original record date. Any business which might have been transacted at the
meeting as originally notified may be deferred and transacted at any such
adjourned meeting at which a quorum shall be present.
Section 8. VOTING; PROXIES. Unless the Corporation's Charter provides
otherwise, each outstanding share of stock, regardless of class, is entitled to
one vote on each matter submitted to a vote at a meeting of stockholders and
majority of all the
2
<PAGE>
votes cast at a meeting at which a quorum is present is sufficient to approve
any matter which properly comes before the meeting, except that a plurality of
all the votes cast at a meeting at which a quorum is present is sufficient to
elect a director. In all elections for directors, each share of stock may be
voted for as many individuals as there are directors to be elected and for whose
election the share is entitled to be voted. A stockholder may vote the stock the
stockholder owns of record either in person or by proxy. A stockholder may sign
a writing authorizing another person to act as proxy. Signing may be
accomplished by the stockholder or the stockholder's authorized agent signing
the writing or causing the stockholder's signature to be affixed to the writing
by any reasonable means, including facsimile signature. A stockholder may
authorize another person to act as proxy by transmitting, or authorizing the
transmission of, a telegram, cablegram, datagram, or other means of electronic
transmission to the person authorized to act as proxy or to a proxy solicitation
firm, proxy support service organization, or other person authorized by the
person who will act as proxy to receive the transmission. Unless a proxy
provides otherwise, it is not valid more than 11 months after its date. A proxy
is revocable by a stockholder at any time without condition or qualification
unless the proxy states that it is irrevocable and the proxy is coupled with an
interest. A proxy may be made irrevocable for so long as it is coupled with an
interest. The interest with which a proxy may be coupled includes an interest in
the stock to be voted under the proxy or another general interest in the
Corporation or its assets or liabilities.
Section 9. VOTING OF STOCK BY CERTAIN HOLDERS. The Board of Directors
may adopt by resolution a procedure by which a stockholder may certify in
writing to the Corporation that any shares of stock registered in the name of
the stockholder are held for the account of a specified person other than the
stockholder. The resolution shall set forth the class of stockholders who may
make the certification, the purpose for which the certification may be made, the
form of certification and the information to be contained in it; if the
certification is with respect to a record date or closing of the stock transfer
books, the time after the record date or closing of the stock transfer books
within which the certification must be received by the Corporation; and any
other provisions with respect to the procedure which the Board of Directors
considers necessary or desirable. On receipt of such certification, the person
specified in the certification shall be regarded as, for the purposes set forth
in the certification, the stockholder of record of the specified stock in place
of the stockholder who makes the certification.
Section 10. INSPECTORS. At any meeting of stockholders, the chairman of
the meeting may appoint one or more persons as inspectors for such meeting. Such
inspectors shall ascertain and report the number of shares represented at the
meeting based upon their determination of the validity and effect of proxies,
count all votes, report the results and perform such other acts as are proper to
conduct the election and voting with impartiality and fairness to all the
stockholders.
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Each report of an inspector shall be in writing and signed by him or by a
majority of them if there is more than one inspector acting at such meeting. If
there is more than one inspector, the report of a majority shall be the report
of the inspectors. The report of the inspector or inspectors on the number of
shares represented at the meeting and the results of the voting shall be prima
facie evidence thereof.
Section 11. NOMINATIONS AND PROPOSALS BY STOCKHOLDERS.
(a) ANNUAL MEETINGS OF STOCKHOLDERS. (1) Nominations of persons for
election to the Board of Directors and the proposal of business to be considered
by the stockholders may be made at an annual meeting of stockholders (i)
pursuant to the Corporation's notice of meeting, (ii) by or at the direction of
the Board of Directors or (iii) by any stockholder of the Corporation who was a
stockholder of record both at the time of giving of notice provided for in this
Section 11(a) and at the time of the annual meeting, who is entitled to vote at
the meeting and who complied with the notice procedures set forth in this
Section 11(a).
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of
this Section 11, the stockholder must have given timely notice thereof in
writing to the secretary of the Corporation and such other business must
otherwise be a proper matter for action by stockholders. To be timely, a
stockholder's notice shall be delivered to the secretary at the principal
executive offices of the Corporation not later than the close of business on the
60th day nor earlier than the close of business on the 90th day prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is advanced by more than
30 days or delayed by more than 60 days from such anniversary date or if the
Corporation has not previously held an annual meeting, notice by the stockholder
to be timely must be so delivered not earlier than the close of business on the
90th day prior to such annual meeting and not later than the close of business
on the later of the 60th day prior to such annual meeting or the tenth day
following the day on which public announcement of the date of such meeting is
first made by the Corporation. In no event shall the public announcement of a
postponement or adjournment of an annual meeting to a later date or time
commence a new time period for the giving of a stockholder's notice as described
above. Such stockholder's notice shall set forth (i) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (ii) asto any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in
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such business of such stockholder and of the beneficial owner, if any, on whose
behalf the proposal is made; and (iii) as to the stockholder giving the notice
and the beneficial owner, if any, on whose behalf the nomination or proposal is
made, (x) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (y) the number of shares
of each class of stock of the Corporation which are owned beneficially and of
record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (a)(2) of
this Section 11 to the contrary, in the event that the number of directors to be
elected to the Board of Directors is increased and there is no public
announcement by the Corporation naming all of the nominees for director or
specifying the size of the increased Board of Directors at least 70 days prior
to the first anniversary of the preceding year's annual meeting, a stockholder's
notice required by this Section 11(a) shall also be considered timely, but only
with respect to nominees for any new positions created by such increase, if it
shall be delivered to the secretary at the principal executive offices of the
Corporation not later than the close of business on the tenth day following the
day on which such public announcement is first made by the Corporation.
(b) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) provided that the Board of Directors has determined that
directors shall be elected at such special meeting, by any stockholder of the
Corporation who is a stockholder of record both at the time of giving of notice
provided for in this Section 11(b) and at the time of the special meeting, who
is entitled to vote at the meeting and who complied with the notice procedures
set forth in this Section 11(b). In the event the Corporation calls a special
meeting of stockholders for the purpose of electing one or more directors to the
Board of Directors, any such stockholder may nominate a person or persons (as
the case may be) for election to such position as specified in the Corporation's
notice of meeting, if the stockholder's notice containing the information
required by paragraph (a)(2) of this Section 11 shall be delivered to the
secretary at the principal executive offices of the Corporation not earlier than
the close of business on the 90th day prior to such special meeting and not
later than the close of business on the later of the 60th day prior to such
special meeting or the tenth day following the day on which public announcement
is first made of the date of the special meeting and of the nominees proposed by
the Board of Directors to be elected at such meeting. In no event shall the
public announcement of a postponement or adjournment of a special meeting to a
later date or time commence a new time period for the giving of a stockholder's
notice as described above.
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(c) GENERAL. (1) Only such persons who are nominated in accordance with
the procedures set forth in this Section 11 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 11. The chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this Section 11 and, if any proposed
nomination or business is not in compliance with this Section 11, to declare
that such nomination or proposal shall be disregarded.
(2) For purposes of this Section 11, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 11, a
stockholder shall also comply with all applicable requirements of state law and
of the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section 11. Nothing in this Section 11 shall be deemed
to affect any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 12. VOTING BY BALLOT. Voting on any question or in any election
may be viva voce unless the presiding officer shall order or any stockholder
shall demand that voting be by ballot.
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed under the direction of its Board of Directors, which may
exercise all of the powers of the Corporation, except such as are by law or by
the Corporation's Charter or by these Bylaws conferred upon or reserved to the
stockholders.
Section 2. INDEPENDENT MAJORITY. A majority of the members of the Board
of Directors shall at all times after the first annual meeting of stockholders
be Independent Directors.
Section 3. NUMBER, TENURE AND QUALIFICATIONS. Subject to the rights of
the holders of any class of stock separately entitled to elect one or more
directors, at each annual meeting the stockholders shall elect directors to hold
office
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until the next annual meeting and until their successors are elected and
qualified. At any regular meeting or at any special meeting called for that
purpose, a majority of the entire Board of Directors may establish, increase or
decrease the number of directors, provided that the number thereof shall never
be less than the minimum number required by the General Laws of the State of
Maryland, nor more than nine, and further provided that the tenure of office of
a director shall not be affected by any decrease in the number of directors.
Section 4. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held not less frequently than once per calendar quarter, with one such
regular meeting of the Board of Directors being held immediately after and at
the same place as the annual meeting of stockholders, no notice other than this
Bylaw being necessary. The Board of Directors may provide, by resolution, the
time and place, either within or without the State of Maryland, for the holding
of regular meetings of the Board of Directors without other notice than such
resolution.
Section 5. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the chairman of the board of directors,
president or by a majority of the directors then in office. The person or
persons authorized to call special meetings of the Board of Directors may fix
any place, either within or without the State of Maryland, as the place for
holding any special meeting of the Board of Directors called by them.
Section 6. CHAIRMAN OF THE BOARD OF DIRECTORS. The chairman of the
board of directors shall preside, if present, at all meetings of the Board of
Directors (if the chairman of the board of directors is not present at a
meeting, then the chief executive officer of the Corporation shall preside at
such meeting). The chairman of the board of directors shall see that all orders
and resolutions of the Board of Directors are carried into effect and shall from
time to time report to the Board of Directors all matters within his or her
knowledge which the interests of the Corporation may require to be brought to
their notice. The chairman of the board of directors shall also perform such
other duties and he or she may exercise such other powers as from time to time
may be delegated to him or her by the Board of Directors.
Section 7. VICE CHAIRMAN OF THE BOARD OF DIRECTORS. The vice chairman
of the board of directors shall perform such duties and may exercise such powers
as from time to time may be delegated to him or her by the Board of Directors.
Section 8. NOTICE. Notice of any special meeting of the Board of
Directors shall be delivered personally or by telephone, facsimile transmission,
United States mail or courier to each director at his business or residence
address. Notice by personal delivery, by telephone or a facsimile transmission
shall be given at least two days prior to the meeting. Notice by mail shall be
given at least five days prior to the meeting and shall be deemed to be given
when deposited in the United States mail
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properly addressed, with postage thereon prepaid. Telephone notice shall be
deemed to be given when the director is personally given such notice in a
telephone call to which he is a party. Facsimile transmission notice shall be
deemed to be given upon completion of the transmission of the message to the
number given to the Corporation by the director and receipt of a completed
answer-back indicating receipt. Neither the business to be transacted at, nor
the purpose of, any annual, regular or special meeting of the Board of Directors
need be stated in the notice, unless specifically required by statute or these
Bylaws.
Section 9. QUORUM. A majority of the entire Board of Directors shall
constitute a quorum for the transaction of business. In the absence of a quorum,
the directors present by majority vote and without notice other than by
announcement may adjourn the meeting from time to time until a quorum shall
attend. At any such adjourned meeting at which a quorum shall be present, any
business may be transacted which might have been transacted at the meeting as
originally notified.
Section 10. VOTING. Unless applicable law, the Corporation's Charter or
these Bylaws requires a greater proportion, the action of a majority of the
directors present at a meeting at which a quorum is present is the action of the
Board of Directors.
Section 11. TELEPHONE MEETINGS. Directors may participate in a meeting
by means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person at
the meeting.
Section 12. ACTION BY DIRECTORS WITHOUT A MEETING. Any action required
or permitted to be taken at a meeting of the Board of Directors may be taken
without a meeting, if an unanimous written consent which sets forth the action
is signed by each member of the Board and filed with the minutes of proceedings
of the Board of Directors.
Section 13. VACANCIES. If for any reason any or all the directors cease
to be directors, such event shall not terminate the Corporation or affect these
Bylaws or the powers of the remaining directors hereunder (even if fewer than
three directors remain). Subject to the rights of the holders of any class of
stock separately entitled to elect one or more directors, the stockholders may
elect a successor to fill a vacancy on the Board of Directors which results from
the removal of a director. A director elected by the stockholders to fill a
vacancy which results from the removal of a director serves for the balance of
the term of the removed director. Subject to the rights of the holders of any
class of stock separately entitled to elect one or more directors, a majority of
the remaining directors, whether or not sufficient to constitute quorum, may
fill a vacancy on the Board of Directors which results from any cause except an
increase in the number of directors, and a majority of the entire Board of
Directors may fill a vacancy
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which results from an increase in the number of directors. A director elected by
the Board of Directors to fill a vacancy serves until the next annual meeting of
stockholders and until his or her successor is elected and qualifies. No
decrease in the number of directors constituting the Board of Directors shall
affect the tenure of office of any director.
Section 14. COMPENSATION. The Corporation will pay an annual director's
fee to each Independent Director equal to $20,000, with no additional fee to be
paid for the first four meetings of the Board of Directors. Each Independent
Director will be paid a fee of $1,000 for each additional meeting of the Board
of Directors attended in person by such Independent Director. In addition, an
annual fee of $2,000 will be paid to any Independent Director who is the chair
of any committee of the Board of Directors. Affiliated Directors shall not
receive any stated salary for their services as directors. All Directors may be
reimbursed for expenses of attendance, if any, at each annual, regular or
special meeting of the Board of Directors or of any committee thereof and for
their expenses, if any, in connection with each property visit and any other
service or activity they performed or engaged in as directors; but nothing
herein contained shall be construed to preclude any directors from serving the
Corporation in any other capacity and receiving compensation therefor.
Section 15. LOSS OF DEPOSITS. No director shall be liable for any loss
which may occur by reason of the failure of the bank, trust company, savings and
loan association, or other institution with whom moneys or stock have been
deposited.
Section 16. SURETY BONDS. Unless required by law, no director shall be
obligated to give any bond or surety or other security for the performance of
any of his duties.
Section 17. RELIANCE. Each director, officer, employee and agent of the
Corporation shall, in the performance of his duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon an opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the adviser, accountants,
appraisers or other experts or consultants selected by the Board of Directors or
officers of the Corporation, regardless of whether such counsel or expert may
also be a director.
Section 18. INVESTMENT POLICIES AND RESTRICTIONS. The investment policies
of the Corporation and the restrictions thereon shall be established from time
to time by the Board of Directors, including a majority of the Independent
Directors; provided, however, that the investment policies of the Corporation
and the limitations thereon shall be at all times in compliance with the
restrictions applicable to real estate investment trusts pursuant to the
Internal Revenue Code of 1986, as it may
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be amended from time to time. The Independent Directors shall review the
investment policies of the Corporation at least annually to determine that the
policies then being followed by the Corporation are in the best interests of its
stockholders. Each such determination and the basis therefor shall be set forth
in the minutes of the Board of Directors.
Section 19. MANAGEMENT AGREEMENTS. The Board of Directors may engage a
Manager to advise the Board of Directors and be responsible for directing the
day-to-day business affairs of the Corporation pursuant to a written agreement
or agreements. The approval of any such management agreement and the renewal or
termination thereof shall require the affirmative vote of a majority of the
Independent Directors.
The Board of Directors shall evaluate the performance of the Manager before
entering into or renewing any management agreement. The minutes of the meetings
with respect to such evaluation shall reflect the criteria used by the Board of
Directors in making such evaluation. Upon any termination of the management
agreement described in the initial registration statement of this Corporation's
initial public offering of securities, the Board of Directors shall determine
that any successor Manager possesses sufficient qualifications (a) to perform
the management function for the Corporation and (b) to justify the compensation
provided for in its contract with the Corporation. Each extension of the
contract for the services of a Manager entered into by the Board of Directors
shall have a term of no more than two years.
In determining whether to enter into or renew any management agreement, the
Independent Directors shall consider the following factors and all other factors
that they may deem relevant and their findings on each of such factors shall be
recorded in the minutes of the Board of Directors:
(a) The size of management fee in relation to the size and profitability
of the investment portfolio of the Corporation;
(b) The success of the Manager in generating opportunities that meet the
investment objectives of the Corporation;
(c) The quality and extent of service and advice furnished by the Manager
to the Corporation;
(d) The rates charged to other corporations similar to the Corporation and
to other investors by advisers performing similar services; and
(e) Additional revenues realized by the Manager and its Affiliates through
their relationship with the Corporation, including loan administration,
underwriting or broker commissions, servicing, engineering, inspection and other
fees, whether paid by
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the Corporation or by others with whom the Corporation does business.
Section 20. RELATED PARTY TRANSACTIONS. A majority of the Independent
Directors shall approve general guidelines ("Guidelines") for the Corporation's
investments, borrowings and operations, and the Independent Directors shall
conduct a quarterly review of all transactions engaged in by the Corporation,
including transactions with the Manager or any Affiliate of the Manager, to
insure compliance with the Guidelines. The Independent Directors shall not be
required to approve transactions between the Corporation and the Manager or any
Affiliate of the Manager.
Section 21. MANAGEMENT BY DIRECTORS. Should the Board of Directors elect
to delegate the duty of management of the Corporation's assets and
administration of the Corporation's day-to-day operations to a Manager the
directors of the Corporation will not be required to devote their full time to
the affairs of the Corporation; provided that the directors devote so much of
their time to the Corporation's affairs as is necessary or required for the
effective conduct and operation of the Corporation's business.
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ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors may
appoint from among its members an Executive Committee, an Audit Committee, a
Compensation Committee, and other committees composed of one or more directors
and delegate to these committees any of the powers of the Board of Directors,
except the power to authorize dividends on stock, elect directors, issue stock
other than as provided in the next sentence, recommend to the stockholders any
action which requires stockholder approval, amend these Bylaws, or approve any
merger or share exchange which does not require stockholder approval. If the
Board of Directors has given general authorization for the issuance of stock
providing for or establishing a method or procedure for determining the maximum
number of shares to be issued, a committee of the Board, in accordance with that
general authorization or any stock option or other plan or program adopted by
the Board of Directors, may authorize or fix the terms of stock subject to
classification or reclassification and the terms on which any stock may be
issued, including all terms and conditions required or permitted to be
established or authorized by the Board of Directors. At least a majority of the
members of any committee shall be composed of Independent Directors.
Section 2. MEETINGS. Notice of committee meetings shall be given in the
same manner as notice for special meetings of the Board of Directors. A majority
of the members of the committee shall constitute a quorum for the transaction of
business at any meeting of the committee. The act of a majority of the committee
members present at a meeting shall be the act of such committee. The Board of
Directors may designate a chairman of any committee, and such chairman or any
two members of any committee may fix the time and place of its meeting unless
the Board shall otherwise provide. In the absence of any member of any such
committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint another director to act in the place of such
absent member. Each committee shall keep minutes of its proceedings.
Section 3. TELEPHONE MEETINGS. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
Section 4. INFORMAL ACTION BY COMMITTEES. Any action required or
permitted to be taken at any meeting of a committee of the Board of Directors
may be taken without a meeting, if an unanimous written consent which sets forth
the action is signed by each member of the committee and such written consent is
filed with the minutes of proceedings of such committee.
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Section 5. VACANCIES. Subject to the provisions hereof, the Board of
Directors shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member or to dissolve any such committee.
ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Corporation shall
include a president, a secretary and a treasurer and may include a chairman of
the board, a vice chairman of the board, a chief executive officer, one or more
senior vice presidents or vice presidents, a chief operating officer, a chief
financial officer, one or more assistant secretaries and one or more assistant
treasurers. In addition, the Board of Directors may from time to time appoint
such other officers with such powers and duties as they shall deem necessary or
desirable. The officers of the Corporation shall be elected annually by the
Board of Directors at the first meeting of the Board of Directors held after
each annual meeting of stockholders, except that the chief executive officer or
president may appoint one or more vice presidents, assistant secretaries and
assistant treasurers. If the election of officers shall not be held at such
meeting, such election shall be held as soon thereafter as may be convenient.
Each officer shall hold office until his successor is elected and qualifies or
until his death, resignation or removal in the manner hereinafter provided. Any
two or more offices except president and vice president may be held by the same
person. In its discretion, the Board of Directors may leave unfilled any office
except that of president, treasurer and secretary. Election or appointment of an
officer or agent shall not of itself create contract rights between the
Corporation and such officer or agent.
Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the
Corporation may be removed by the Board of Directors if in its judgment the best
interests of the Corporation would be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed. Any
officer of the Corporation may resign at any time by giving written notice of
his resignation to the Board of Directors, the chairman of the board, the
president or the secretary. Any resignation shall take effect at any time
subsequent to the time specified therein or, if the time when it shall become
effective is not specified therein, immediately upon its receipt. The acceptance
of a resignation shall not be necessary to make it effective unless otherwise
stated in the resignation. Such resignation shall be without prejudice to the
contract rights, if any, of the officer, agent or Corporation.
Section 3. VACANCIES. A vacancy in any office may be filled by the Board
of Directors for the balance of the term.
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Section 4. CHIEF EXECUTIVE OFFICER. The Board of Directors may designate
a chief executive officer. In the absence of such designation, the president
shall be the chief executive officer of the Corporation. The chief executive
officer shall have general responsibility for implementation of the policies of
the Corporation, as determined by the Board of Directors, and for the management
of the business and affairs of the Corporation. If the chairman of the board of
directors is not present at a meeting of the Board of Directors then the chief
executive officer of the Corporation shall act as the chairman of the board of
directors at such meeting and shall preside over such meeting.
Section 5. CHIEF OPERATING OFFICER. The Board of Directors may designate
a chief operating officer. The chief operating officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 6. CHIEF FINANCIAL OFFICER. The Board of Directors may designate
a chief financial officer. The chief financial officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 7. PRESIDENT. The president or chief executive officer, as the
case may be, shall in general supervise and control all of the business and
affairs of the Corporation. In the absence of a designation of a chief operating
officer by the Board of Directors, the president shall be the chief operating
officer. He may execute any deed, mortgage, bond, contract or other instrument,
except in cases where the execution thereof shall be expressly delegated by the
Board of Directors or by these Bylaws to some other officer or agent of the
Corporation or shall be required by law to be otherwise executed; and in general
shall perform all duties incident to the office of president and such other
duties as may be prescribed by the Board of Directors from time to time.
Section 8. VICE PRESIDENTS. In the absence of the president or in the
event of a vacancy in such office, the senior vice president (or in the event
there be more than one senior vice president, the senior vice presidents in the
order designated at the time of their appointment or election or, in the absence
of any designation, then in the order of their appointment or election, or if
there be no senior vice presidents, the vice president or vice presidents in the
order designated at the time of their appointment or election or, in the absence
of any designation, in the order of their
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appointment or election) shall perform the duties of the president and when so
acting shall have all the powers of and be subject to all the restrictions upon
the president; and shall perform such other duties as from time to time may be
assigned to him by the president or by the Board of Directors. The Board of
Directors may designate one or more vice presidents as executive vice president
or as vice president for particular areas of responsibility.
Section 9. SECRETARY. The secretary shall (a) keep the minutes of the
proceedings of the stockholders, the Board of Directors and committees of the
Board of Directors in one or more books provided for that purpose; (b) see that
all notices are duly given in accordance with the provisions of these Bylaws or
as required by law; (c) be custodian of the corporate records and of the seal of
the Corporation; (d) keep a register of the post office address of each
stockholder which shall be furnished to the secretary by such stockholder; (e)
have general charge of the share transfer books of the Corporation; and (f) in
general perform such other duties as from time to time may be assigned to him by
the chief executive officer, the president or by the Board of Directors.
Section 10. TREASURER. The treasurer shall have the custody of the funds
and securities of the Corporation and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. In the absence of a designation of a chief financial officer by the
Board of Directors, the treasurer shall be the chief financial officer of the
Corporation.
The treasurer shall disburse the funds of the Corporation as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the president and Board of Directors, at the regular meetings of
the Board of Directors or whenever it may so require, an account of all his
transactions as treasurer and of the financial condition of the Corporation.
If required by the Board of Directors, the treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, moneys and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 11. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant
secretaries and assistant treasurers, in general, shall perform such duties as
shall be assigned to them by the secretary or treasurer, respectively, or by the
president or the Board of Directors. The assistant treasurers shall, if required
by the Board of Directors, give bonds for the faithful performance of
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their duties in such sums and with such surety or sureties as shall be
satisfactory to the Board of Directors.
Section 12. SALARIES. The salaries and other compensation of the officers
shall be fixed from time to time by the Board of Directors and no officer shall
be prevented from receiving such salary or other compensation by reason of the
fact that he is also a director.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Board of Directors may authorize any officer or
agent to enter into any contract or to execute and deliver any instrument in the
name of and on behalf of the Corporation and such authority may be general or
confined to specific instances. Any agreement, deed, mortgage, lease or other
document executed by one or more of the directors or by an authorized person
shall be valid and binding upon the Board of Directors and upon the Corporation
when authorized or ratified by action of the Board of Directors.
Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation shall be signed by such officer or agent of the Corporation in
such manner as shall from time to time be determined by the Board of Directors.
Section 3. DEPOSITS. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the Board of Directors may
designate.
ARTICLE VII
STOCK
Section 1. CERTIFICATES. Each stockholder is entitled to certificates
which represent and certify the shares of stock he or she holds in the
Corporation. Each stock certificate shall include on its face the name of the
Corporation, the name of the stockholder or other person to whom it is issued,
and the class of stock and number of shares it represents. It shall also include
on its face or back (a) a statement of any restrictions on transferability and
(b) a statement which provides in substance that the Corporation will furnish to
any stockholder on request and without charge a full statement of the
designations and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption of the stock of each class which the Corporation is
authorized
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to issue, of the difference in the relative rights and preferences between the
shares of each series of a preferred or special class in series which the
Corporation is authorized to issue, to the extent they have been set, and of the
authority of the Board of Directors to set the relative rights and preferences
of subsequent series of a preferred or special class of stock and any
restrictions on transferability. Such request may be made to the secretary or to
its transfer agent. It shall be in such form, not inconsistent with law or with
the Corporation's Charter, as shall be approved by the Board of Directors or any
officer or officers designated for such purpose by resolution of the Board of
Directors. Each stock certificate shall be signed by the chairman of the board,
the president, or a senior vice-president, and countersigned by the secretary,
an assistant secretary, the treasurer, or an assistant treasurer. Each
certificate may be sealed with the actual corporate seal or a facsimile of it or
in any other form and the signatures may be either manual or facsimile
signatures. A certificate is valid and may be issued whether or not an officer
who signed it is still an officer when it is issued. A certificate may not be
issued until the stock represented by it is fully paid.
Section 2. TRANSFERS. Upon surrender to the Corporation or the transfer
agent of the Corporation of a stock certificate duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, the
Corporation shall issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The Corporation shall be entitled to treat the holder of record of any
share of stock as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such share or
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.
Notwithstanding the foregoing, transfers of shares of any class of stock
will be subject in all respects to the Corporation's Charter and all of the
terms and conditions contained therein.
Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the Board
of Directors may direct a new certificate to be issued in place of any
certificate previously issued by the Corporation alleged to have been lost,
stolen or destroyed upon the making of an affidavit of that fact by the person
claiming the certificate to be lost, stolen or destroyed. When authorizing the
issuance of a new certificate, an officer designated by the Board of Directors
may, in his discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or the owner's
legal representative to advertise the same in such manner as he shall require
and/or to give bond, with sufficient surety, to the Corporation to indemnify it
against any loss or claim which may arise as a result of the issuance of a new
certificate.
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Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Board
of Directors may set, in advance, a record date for the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders or
determining stockholders entitled to receive payment of any dividend or the
allotment of any other rights, or in order to make a determination of
stockholders for any other proper purpose. Such date, in any case, shall not be
prior to the close of business on the day the record date is fixed and shall be
not more than 90 days and, in the case of a meeting of stockholders, not less
than ten days, before the date on which the meeting or particular action
requiring such determination of stockholders of record is to be held or taken.
In lieu of fixing a record date, the Board of Directors may provide that
the stock transfer books shall be closed for a stated period but not longer than
20 days. If the stock transfer books are closed for the purpose of determining
stockholders entitled to notice of or to vote at a meeting of stockholders, such
books shall be closed for at least ten days before the date of such meeting.
If no record date is fixed and the stock transfer books are not closed for
the determination of stockholders, (a) the record date for the determination of
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day on which the notice of meeting is mailed
or the 30th day before the meeting, whichever is the closer date to the meeting;
and (b) the record date for the determination of stockholders entitled to
receive payment of a dividend or an allotment of any other rights shall be the
close of business on the day on which the resolution of the directors, declaring
the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, except when (i) the determination has been
made through the closing of the transfer books and the stated period of closing
has expired or (ii) the meeting is adjourned to a date more than 120 days after
the record date fixed for the original meeting, in either of which case a new
record date shall be determined as set forth herein.
Section 5. STOCK LEDGER. The Corporation shall maintain at its principal
office or at the office of its counsel, accountants or transfer agent, an
original or duplicate share ledger containing the name and address of each
stockholder and the number of shares of each class held by such stockholder.
Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of Directors
may issue fractional stock or provide for the issuance of scrip, all on such
terms and under such conditions as they may determine. Notwithstanding any other
provision of the Corporation's Charter or these Bylaws, the Board of Directors
may issue units consisting of different securities of the Corporation. Any
security issued in
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a unit shall have the same characteristics as any identical securities issued by
the Corporation, except that the Board of Directors may provide that for a
specified period securities of the Corporation issued in such unit may be
transferred on the books of the Corporation only in such unit.
Section 6. EXEMPTION FROM CONTROL SHARE ACQUISITION STATUTE. To the
fullest extent permitted by Maryland law, the capital stock of the Corporation
shall be exempt from the provisions of Sections 3-701 to 3-709 of the
Corporations and Associations Article of the Annotated Code of Maryland (as the
same may be amended) and any successor statutes.
ARTICLE VIII
ACCOUNTING YEAR
The fiscal year of the Corporation shall end on December 31st of each year.
The Board of Directors shall have the power from time to time to change the
fiscal year provided that such change does not cause the Corporation to fail to
qualify as a REIT.
ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon the
stock of the Corporation may be authorized and declared by the Board of
Directors and may be paid in cash, property or stock of the Corporation, subject
to the provisions of law and the Corporation's Charter, to insure that the
Corporation satisfies the requirements for qualification as a REIT.
Section 2. CONTINGENCIES. Before payment of any dividends or other
distributions, there may be set aside out of any assets of the Corporation
available for dividends or other distributions such sum or sums as the Board of
Directors may from time to time, in its absolute discretion, think proper as a
reserve fund for contingencies, for equalizing dividends or other distributions,
for repairing or maintaining any property of the Corporation or for such other
purpose as the Board of Directors shall determine to be in the best interest of
the Corporation, and the Board of Directors may modify or abolish any such
reserve in the manner in which it was created.
ARTICLE X
INVESTMENT POLICY
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Subject to the provisions of the Corporation's Charter, the Board of
Directors, including a majority of the Independent Directors, may from time to
time adopt, amend, revise or terminate any policy or policies with respect to
investments by the Corporation as it shall deem appropriate in its sole
discretion.
ARTICLE XI
SEAL
Section 1. SEAL. The Board of Directors may authorize the adoption of a
seal by the Corporation. The seal shall contain the name of the Corporation and
the year of its incorporation and the words "Incorporated in Maryland." The
Board of Directors may authorize one or more duplicate seals and provide for the
custody thereof.
Section 2. AFFIXING SEAL. Whenever the Corporation is permitted or
required to affix its seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a seal to place the word
"(SEAL)" adjacent to the signature of the person authorized to execute the
document on behalf of the Corporation.
ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES
The Corporation shall indemnify and hold harmless and, without requiring a
determination of the ultimate entitlement to indemnification, pay reasonable
expenses in advance of the final disposition of any proceeding to (A) its
present and former directors and officers, whether serving the Corporation or at
its request any other entity, to the full extent required or permitted by the
General Laws of the State of Maryland now or hereafter in force, including the
advance of expenses under the procedures and to the full extent permitted by law
and (B) other employees and agents to such extent as shall be authorized by the
Board of Directors or the Corporation's Charter and be permitted by law. The
foregoing rights of indemnification shall not be exclusive of any other rights
to which those seeking indemnification may be entitled.
Any indemnification, or payment of expenses in advance of the final
disposition of any proceeding, shall be made promptly, and in any event within
60 days, upon the written request of the director or officer entitled to seek
indemnification (the "Indemnified Party"). The right to indemnification and
advances hereunder shall be enforceable by the Indemnified Party in any court of
competent jurisdiction, if (i) the Corporation denies such request, in whole or
in part, or (ii) no disposition thereof is made within 60 days. The Indemnified
Party's costs and expenses incurred in connection with successfully establishing
his or her right to indemnification, in whole
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or in part, in any such action shall also be reimbursed by the Corporation. It
shall be a defense to any action for advance for expenses that (a) a
determination has been made that the facts then known to those making the
determination would preclude indemnification or (b) the Corporation has not
received both (i) an undertaking as required by law to repay such advances in
the event it shall ultimately be determined that the standard of conduct has not
been met and (ii) a written affirmation by the Indemnified Party of such
Indemnified Party's good faith belief that the standard of conduct necessary for
indemnification by the Corporation has been met.
The indemnification and advance of expenses provided by the Corporation's
Charter and these By-Laws shall not be deemed exclusive of any other rights to
which a person seeking indemnification or advance of expenses may be entitled
under any law (common or statutory), or any agreement, vote of stockholders or
disinterested directors or other provision that is consistent with law, both as
to action in his or her official capacity and as to action in another capacity
while holding office or while employed by or acting as agent for the
Corporation, shall continue in respect of all events occurring while a person
was a director or officer after such person has ceased to be a director or
officer, and shall inure to the benefit of the estate, heirs, executors and
administrators of such person. The Corporation shall not be liable for any
payment under this Bylaw in connection with a claim made by a director or
officer to the extent such director or officer has otherwise actually received
payment under insurance policy, agreement, vote or otherwise, of the amounts
otherwise indemnifiable hereunder. All rights to indemnification and advance of
expenses under the Corporation's Charter and hereunder shall be deemed to be a
contract between the Corporation and each director or officer of the Corporation
who serves or served in such capacity at any time while this Bylaw is in effect.
Nothing herein shall prevent the amendment of this Bylaw, provided that no such
amendment shall diminish the rights of any person hereunder with respect to
events occurring or claims made before its adoption or as to claims made after
its adoption in respect of events occurring before its adoption. Any repeal or
modification of this Bylaw shall not in any way diminish any rights to
indemnification or advance of expenses of such director or officer or the
obligations of the Corporation arising hereunder with respect to events
occurring, or claims made, while this Bylaw or any provision hereof is in force.
Neither the amendment nor repeal of this Article XII, nor the adoption or
amendment of any other provision of these Bylaws or the Corporation's Charter
inconsistent with this Article XII, shall apply to or affect in any respect the
applicability of the preceding paragraph with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.
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ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the Corporation's
Charter or these Bylaws or pursuant to applicable law, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at nor the purpose of any
meeting need be set forth in the waiver of notice, unless specifically required
by statute. The attendance of any person at any meeting shall constitute a
waiver of notice of such meeting, except where such person attends a meeting for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
ARTICLE XIV
AMENDMENT OF BYLAWS
In accordance with the Corporation's Charter, these Bylaws may be repealed,
altered, amended or rescinded by the stockholders of the Corporation only by
vote of not less than two-thirds of the outstanding shares of capital stock of
the Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) cast at a meeting of the stockholders
called for that purpose (provided that notice of such proposed repeal,
alteration, amendment or rescission is included in the notice of such meeting).
In addition, except as otherwise provided in the Corporation's Charter and in
these Bylaws, the Board of Directors may repeal, alter, amend or rescind these
Bylaws by vote of a majority of the Board of Directors at a meeting held in
accordance with the provisions of these Bylaws.
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EXHIBIT 10.1
FORM OF MANAGEMENT AGREEMENT
THIS AGREEMENT, dated as of ___________, 1997 by and among IMPERIAL CREDIT
COMMERCIAL MORTGAGE INVESTMENT CORP., a Maryland corporation ("ICCMIC" and
together with its subsidiaries, the "Company"), and IMPERIAL CREDIT ASSET
MANAGEMENT CORPORATION, a California corporation (the "Manager");
WITNESSETH:
WHEREAS, the Company intends to invest in Mortgage Loans, MBS Interests,
Real Property and Non-Real Estate Assets ("REIT Investments") and expects to
qualify for the tax benefits of a real estate investment trust (a "REIT")
accorded by Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended (the "Code"); and
WHEREAS, the Company desires to retain the Manager to advise and counsel
the Company as to the acquisition and sale of, and to otherwise manage the
investments of, the Company and to perform administrative services for the
Company in the manner and on the terms set forth herein;
NOW THEREFORE, in consideration of the mutual agreements herein set forth,
the parties hereto agree as follows:
SECTION 1. Definitions. Capitalized terms used but not defined herein
-----------
shall have the respective meanings assigned them in the Prospectus of ICCMIC
dated _________, 1997. In addition, the following terms shall have the
following:
(a) "Agreement" means this Management Agreement, as amended from time to
time.
(b) "Closing Date" means the date of closing of the Company's initial
public offering of Common Stock.
(c) "Governing Instruments" means the charter and bylaws in the case of a
corporation, or the partnership agreement in the case of a partnership.
(d) "Subsidiary" means any subsidiary of the Company and any partnership, a
general partner of which is the Company or any subsidiary of the Company.
SECTION 2. Duties of the Manager.
------ -- --- -------
(a) The Manager at all times will be subject to the supervision of ICCMIC's
Board of Directors (the "Board of Directors") and will have only such functions
and authority as the Company delegates to it. The Manager will advise the Board
of Directors as to the activities and operations of the Company. The Manager
shall be responsible for the day-to-day business affairs of the Company pursuant
to the authority granted to it by the Board of Directors under this Agreement,
and the Manager will perform (or cause to be performed) such services and
activities relating to the assets and operations of the Company as may be
directed by the Board of Directors or as the Manager otherwise considers
appropriate, including:
(i) serving as the Company's consultant with respect to formulation
of investment criteria and preparation of policy Guidelines by the Board of
Directors;
(ii) advising and representing the Company in connection with the
acquisition and commitment to acquire assets, the sale and commitment to
sell assets, and the maintenance and administration of its portfolio of
assets;
<PAGE>
(iii) advising the Company regarding, and arranging for, (a) the
issuance of CMOs collateralized by the Company's Mortgage Loans, (b)
reverse repurchase agreements on the Company's MBS Interests, and (c) other
borrowings, as appropriate;
(iv) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for
the Company by the Manager;
(v) monitoring and providing to the Board of Directors on an
ongoing basis price information and other data obtained from dealers that
maintain markets in assets identified by the Board of Directors from time
to time, and providing data and advice to the Board of Directors in
connection with the identification of such dealers;
(vi) providing executive and administrative personnel, office space
and office services required in rendering services to the Company;
administering the day-to-day operations of the Company; and performing and
supervising the performance of such other administrative functions
necessary in the management of the Company, including the collection of
revenues and the payment of the Company's debts and obligations and
maintenance of appropriate computer services to perform such administrative
functions;
(vii) communicating on behalf of the Company with the holders of any
equity or debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies or
trading markets and to maintain effective relations with such holders;
(viii) to the extent not otherwise subject to an agreement executed by
the Company, designating a servicer for mortgage loans sold to the Company
and arranging for the monitoring and administering of such servicers;
(ix) counseling the Company in connection with policy decisions to be
made by the Board of Directors;
(x) engaging in hedging activities on behalf of the Company which are
consistent with the Company's status as a REIT and with the Guidelines;
(xi) upon request by and in accordance with the directions of the
Board of Directors, investing or reinvesting any money of the Company;
(xii) counseling the Company regarding the maintenance of its
exemption from the Investment Company Act and monitoring compliance with
the requirements for maintaining exemption from that Act;
(xiii) counseling the Company regarding the maintenance of its status
as a REIT and monitoring compliance with the various REIT qualification
tests and other rules set out in the Code and Treasury Regulations
thereunder; and
(xiv) counseling the Company as to compliance with all applicable
laws, including those that would require the Company to qualify to do
business in particular jurisdictions.
(b) Portfolio Management. The Manager will perform portfolio management
--------------------
services on behalf of the Company with respect to the Company's investments.
Such services will include, but not be limited to, consulting the Company on
purchase, sale and other opportunities, collection of information and submission
of reports pertaining to the Company's assets, interest rates, and general
economic conditions, periodic review and evaluation of the performance of the
Company's portfolio of assets, acting as liaison between the Company and
banking, mortgage banking, investment banking and other parties with respect to
the purchase, financing and disposition of assets, and other customary functions
related to portfolio management. The Manager may enter
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into subcontracts with other parties, including Imperial Credit and its
affiliates, to provide any such services to the Company.
(c) Monitoring of Primary Servicing. The Manager will monitor and
-------------------------------
administer the loan servicing activities provided by servicers of the Company's
Mortgage Loans, other than loans pooled to collateralize MBS Interests or
pledged to secure MBS Interests. Such monitoring and administrative services
will include, but not be limited to, the following activities: serving as the
Company's consultant with respect to the servicing of loans; collection of
information and submission of reports pertaining to the mortgage loans and to
moneys remitted to the Manager or the Company by servicers; periodic review and
evaluation of the performance of each servicer to determine its compliance with
the terms and conditions of the servicing agreement and, if deemed appropriate,
recommending to the Company the termination of such servicing agreement; acting
as a liaison between servicers and the Company and working with servicers to the
extent necessary to improve their servicing performance; review of and
recommendations as to fire losses, easement problems and condemnation,
delinquency and foreclosure procedures with regard to the Mortgage Loans; review
of servicers' delinquency, foreclosing and other reports on Mortgage Loans;
advising as to and supervising claims filed under any mortgage insurance
policies; and enforcing the obligation of any servicer to repurchase Mortgage
Loans from the Company.
(d) Monitoring of Special Servicing. The Manager will perform monitoring
-------------------------------
services on behalf of the Company with respect to loan servicing activities
provided by third parties and with respect to the Company's rights to service
the Company's portfolio of Special Servicing rights. Such monitoring services
will include, but not be limited to: negotiating Special Servicing agreements;
acting as liaison between the servicers of the Mortgage Loans and the Company;
review of servicer's delinquency, foreclosures and other reports on Mortgage
Loans; supervising claims filed under any mortgage insurance policies; and
enforcing the obligation of any servicer to repurchase Mortgage Loans.
(e) Efforts. The Manager agrees to use commercially reasonable efforts at
-------
all times in performing services for the Company hereunder.
SECTION 3. Additional Activities of Manager. Nothing herein shall limit or
--------------------------------
restrict the right of the Manager or any of its officers, directors, employees
or Affiliates to engage in any business or to render services of any kind to any
other person including the purchase of, or rendering advice to others
purchasing, assets that meet the Company's policies and criteria, except that
the Manager may not manage or advise another REIT or other entity that invests
or intends to invest primarily in commercial and multifamily Mortgage Loans or
subordinated CMBS Interests. Moreover, the Manager shall require its President,
Senior Vice Presidents and certain other executive officers to execute non-
compete agreements that will preclude them from leaving the Manager and, subject
to the geographic, time and other limitations, if any, that may be set forth
therein, forming or joining another REIT that invests or intends to invest
primarily in commercial and multifamily Mortgage Loans or subordinated CMBS
Interests.
Directors, officers, employees and agents of the Manager or Affiliates of
the Manager may serve as directors, officers, employees, agents, nominees or
signatories for the Company or any of its Subsidiaries, to the extent permitted
by their Governing Instruments, as from time to time amended, or by any
resolutions duly adopted by the Board of Directors pursuant to the Company's or
any of its Subsidiaries' Governing Instruments. When executing documents or
otherwise acting in such capacities for the Company, such persons shall use
their respective titles in the Company.
SECTION 4. Commitments. In order to meet the investment requirements of
-----------
the Company, as determined by the Board of Directors from time to time, the
Manager agrees at the direction of the Board of Directors to issue on behalf of
the Company commitments on such terms as are established by the Board of
Directors, for the acquisition by the Company of assets.
SECTION 5. Bank Accounts. At the direction of the Board of Directors, the
-------------
Manager may establish and maintain one or more bank accounts in the name of
ICCMIC or any of its subsidiaries, and may collect and deposit funds into any
such account or accounts, and disburse funds from any such account or accounts,
under such terms and conditions as the Board of Directors may approve; and the
Manager shall from time to time render
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appropriate accountings of such collections and payments to the Board of
Directors and, upon request, to the auditors of ICCMIC or any of its
subsidiaries.
SECTION 6. Records; Confidentiality. The Manager shall maintain
------- ---------------
appropriate books of accounts and records relating to services performed
hereunder, and such books of account and records shall be accessible for
inspection by representatives of the Company or any of its Subsidiaries at any
time during normal business hours. The Manager shall keep confidential any and
all information obtained in connection with the services rendered hereunder and
shall not disclose any such information to nonaffiliated third parties except
with the prior written consent of the Board of Directors or as may be required
by law or order of a court or other tribunal having requisite jurisdiction.
SECTION 7. Obligations of Manager.
----------------------
(a) The Manager shall require each seller or transferor of assets to be
acquired by the Company to make such representations and warranties regarding
such assets as may be directed by the Board of Directors, or, if no such
directions are given, as may, in the judgment of the Manager, be necessary and
appropriate. In addition, the Manager shall take such other action as may be
directed by the Board of Directors, or, if no such directions are given, as it
deems necessary or appropriate with regard to the protection of the Company's
assets.
(b) The Manager shall refrain from any action that, in its sole judgment
made in good faith, would adversely affect the status of ICCMIC as a REIT, or as
exempt from regulation under the Investment Company Act or that, in its sole
judgment made in good faith, would violate any law, rule or regulation of any
governmental body or agency having jurisdiction over the Company or any of its
Subsidiaries or that would otherwise not be permitted by their respective
Governing Instruments. If the Manager is ordered to take any such action by the
Board of Directors, the Manager shall promptly notify the Board of Directors of
the Manager's judgment that such action would adversely affect such status or
violate any such law, rule or regulation or the Governing Instruments.
Notwithstanding the foregoing, the Manager, its directors, officers,
stockholders and employees shall not be liable to the Company or any of its
Subsidiaries, the Independent Directors, or ICCMIC's or any of its subsidiaries'
stockholders or partners for any act or omission by the Manager, its directors,
officers, stockholders or employees except as provided in Section 11 of this
Agreement.
SECTION 8. Compensation.
------------
(a) Commencing with the first fiscal quarter after the Closing Date, the
Company shall pay to the Manager, for services rendered under this Agreement, a
base management fee calculated as a percentage of the Average Invested Assets of
the Company for such quarter (pro rated based on the number of days elapsed
during any partial fiscal quarter), and equal to 1% per annum of the first $1
billion of such Average Invested Assets, 0.75% of the next $250 million of such
Average Invested Assets, and 0.50% of Average Invested Assets above $1.25
billion.
(b) The Company shall pay to the Manager incentive compensation for each
fiscal quarter in an amount equal the product of (A) 25% of the dollar amount by
which (1)(a) Funds from Operations of the Company (before the incentive fee) per
share of Common Stock (based on the weighted average number of shares
outstanding) plus (b) gains (or minus losses) from debt restructuring and sales
of property per share of Common Stock (based on the weighted average number of
shares outstanding), exceed (2) an amount equal to (a) the weighted average of
the price per share at the initial offering and the prices per share at any
secondary offerings by the Company multiplied by (b) the Ten-Year U.S. Treasury
Rate plus four percent per annum multiplied by (B) the weighted average number
of shares of Common Stock outstanding during such quarter. "Funds from
Operations" as defined by the National Association of Real Estate Investment
Trusts ("NAREIT") means net income (computed in accordance with GAAP) excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization on real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. Funds from Operations does not
represent cash generated from operating activities in accordance with GAAP and
should not be considered as an alternative to net income as an indication of the
Company's performance or to cash flows as a measure of liquidity or ability to
make distributions. As used in calculating the Manager's compensation, the term
"Ten Year U.S. Treasury Rate" means the arithmetic average of the weekly average
yield to maturity for actively traded current coupon U.S. Treasury fixed
interest rate securities (adjusted to constant maturities of ten years)
published by the Federal Reserve Board during a
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quarter, or, if such rate is not published by the Federal Reserve Board, any
Federal Reserve Bank or agency or department of the federal government selected
by the Company. If the Company determines in good faith that the Ten Year U.S.
Treasury Rate cannot be calculated as provided above, then the rate shall be the
arithmetic average of the per annum average yields to maturities, based upon
closing asked prices on each business day during a quarter, for each actively
traded marketable U.S. Treasury fixed interest rate security with a final
maturity date not less than eight nor more than twelve years from the date of
the closing asked prices as chosen and quoted for each business day in each such
quarter in New York City by at least three recognized dealers in U.S. government
securities selected by the Company.
(c) The Manager shall compute the compensation payable under Sections 8(a)
and 8(b) of this Agreement within 45 days after the end of each fiscal quarter.
A copy of the computations made by the Manager to calculate its compensation
shall thereafter promptly be delivered to the Board of Directors and, upon such
delivery, payment of the compensation earned under Sections 8(a) and 8(b) of
this Agreement shown therein shall be due and payable within 60 days after the
end of such fiscal quarter.
(d) The Manager may charge the Company for any out of pocket expenses that
the Manager incurs in connection with employing third parties to conduct due
diligence on assets considered for purchase by the Company.
(e) The Company is granting to the Manager and directors and executive
officers of the Manager and certain other persons options (the "Options") to
purchase 2,000,000 shares of common stock of the Company (2,300,000 shares if
the Underwriters exercise in full their overallotment option) at a price per
share equal to the initial offering price therefor pursuant to the terms of the
Company's 1997 Stock Option Plan. One-third of the Options so granted to the
Manager and its directors and executive officers will be exercisable by them on
each of the first three anniversaries of the Closing Date of the initial public
offering of the Company's Common Stock, and unexercised Options shall terminate
on the tenth anniversary of that Closing Date.
SECTION 9. Expenses of the Company. The Company or any Subsidiary shall
-----------------------
pay all of its expenses and shall reimburse the Manager for documented expenses
of the Manager incurred on its behalf.
SECTION 10. Calculations of Expenses. Expenses incurred by the Manager on
------------------------
behalf of the Company shall be reimbursed quarterly to the Manager within 60
days after the end of each quarter. The Manager shall prepare a statement
documenting the expenses of the Company and those incurred by the Manager on
behalf of the Company during each quarter, and shall deliver such statement to
the Company within 45 days after the end of each quarter.
SECTION 11. Limits of Manager Responsibility. The Manager assumes no
--------------------------------
responsibility under this Agreement other than to render the services called for
hereunder in good faith and shall not be responsible for any action of the Board
of Directors in following or declining to follow any advice or recommendations
of the Manager, including as set forth in Section 7(b) of this Agreement. The
Manager, its directors, officers, stockholders and employees under or in
connection with this Agreement, except by reason of acts constituting bad faith,
willful misconduct, gross negligence or reckless disregard of their duties. The
Company and its Subsidiaries shall reimburse, indemnify, defend and hold
harmless the Manager, its stockholders, directors, officers and employees of and
from any and all expenses, losses, damages, liabilities, demands, charges and
claims of any nature whatsoever, (including attorneys' fees) in respect of or
arising from any acts or omissions of the Manager, its stockholders, directors,
officers and employees made in good faith in the performance of the Manager's
duties under this Agreement and not constituting bad faith, willful misconduct,
gross negligence or reckless disregard of its duties.
SECTION 12. No Joint Venture. The Company and the Manager are not partners
----------------
or joint venturers with each other and nothing herein shall be construed to make
them such partners or joint venturers or impose any liability as such on either
of them.
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SECTION 13. Term. This Agreement shall continue in force and effect until
----
_________________, 1999, subject to being terminated for cause as provided in
Section 14 herein. After _______________, 1999, the term of this Agreement may
be extended with the consent of the Manager and with the affirmative vote of a
majority of the Independent Directors. Each extension shall be executed in
writing by all parties hereto before the expiration of this Agreement or, if
applicable, the most recent extension thereof. Each such extension shall be
effective for a period of one year. At any time after ________, 1999, this
Agreement may be terminated without cause by a majority vote of the Independent
Directors, which termination shall first become effective as of the 60th day
after the receipt by the Manager of a written notice of such termination from
the Company. A failure to extend the term of this Agreement at the expiration of
its term (or, if the term of this Agreement shall have been extended pursuant to
this Section 13, at the expiration of the most recent extension) shall be deemed
for all purposes of this Agreement to be a termination of this Agreement
pursuant to this Section 13. If this Agreement is terminated pursuant to this
Section 13, the unvested Options granted to the Manager and directors and
executive officers of the Manager pursuant to Section 8(e) shall continue to
vest in the manner described in Section 8(e) and in the Company's 1997 Stock
Option Plan.
SECTION 14. Termination for Cause. This Agreement, or any extension
---------------------
hereof, may be terminated by either party for cause immediately upon written
notice, (i) by a majority vote of the Independent Directors in the case of
termination by the Company, or (ii) by a majority vote of the directors of the
Manager, in the case of termination by the Manager. Grounds for termination for
cause will occur with respect to a party if:
(i) Such party shall have violated any provision of this Agreement
and, after notice of such violation, shall not have cured such default
within 30 days; or
(ii) There is entered an order for relief or similar decree or order
with respect to the other party by a court having jurisdiction in an
involuntary case under the federal bankruptcy laws as now or hereafter
constituted or under any applicable federal or state bankruptcy, insolvency
or other similar laws; or the other party (A) admits in writing its
inability to pay its debts as they become due and payable, or makes a
general assignment for the benefit of, or enters into any composition or
arrangement with, creditors; (B) applies for, or consents (by admission of
material allegations of a petition or otherwise) to the appointment of a
receiver, trustee, assignee, custodian, liquidator or sequestrator (or
other similar official) of the other party or of any substantial part of
its properties or assets, or authorizes such an application or consent, or
proceedings seeking such appointment are commenced without such
authorization, consent or application against the other party and continue
undismissed for 30 days; (C) authorizes or files a voluntary petition in
bankruptcy, or applies for or consents (by admission of material
allegations of a petition or otherwise) to the application of any
bankruptcy, reorganization, arrangement, readjustment of debt, insolvency,
dissolution, liquidation or other similar law of any jurisdiction, or
authorizes such application or consent, or proceedings to such end are
instituted against the other party without such authorization, application
or consent and are approved as properly instituted and remain undismissed
for 30 days or results in adjudication of bankruptcy or insolvency; or (D)
permits or suffers all or any substantial part of its properties or assets
to be sequestered or attached by court order and the order remains
undismissed for 30 days.
Each party agrees that if any of the events specified in this Section 14
shall occur, it will give prompt written notice thereof to the other party's
Board of Directors after the happening of such event.
If this Agreement is terminated pursuant to this Section 14, such
termination shall be without any further liability or obligation of either party
to the other, except as provided in Section 16 of this Agreement. Upon the
proper termination of this Agreement pursuant to this Section 14, the Options
granted to the Manager and directors and executive officers of the Manager
pursuant to Section 8(e) that are unvested as of the date of termination shall
expire.
SECTION 15. Buyout of Agreement. If, at any time after __________________,
-------------------
1999, this Agreement is not renewed by the Company, or if this Agreement is
terminated by the Company at any time pursuant to Section 13 of this Agreement,
then the Company, in addition to its obligations under Section 16, shall pay the
Manager a termination fee determined by an independent appraisal. Such
appraisal shall be conducted by a
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nationally-recognized appraisal firm mutually agreed upon by the parties and the
costs of such appraisal shall be borne equally by the parties. If the parties
are unable to agree upon such appraisal firm within 30 days following notice of
termination or, in the event of non-renewal, the termination date, then each
party shall as soon as reasonably practicable, but in no event more than 45 days
following notice of termination or, in the event of non-renewal, the termination
date, choose an independent appraisal firm to conduct an appraisal. In such
event, (i) if the appraisals prepared by the two appraisers so selected are the
same or differ by an amount that does not exceed 10% of the higher of the two
appraisals, the termination fee shall be deemed to be the average of the
appraisals as prepared by each party's chosen appraiser, and (ii) if these two
appraisals differ by more than 10% of such higher amount, the two appraisers
together shall, as soon therafter as is reasonably practicable but in no event
more than 45 days after the date of the later of such two appraisals, select a
third appraisal firm to conduct an appraisal. If they are unable to agree as to
the identity of such third appraiser within such 45 day period, either party can
request that the American Arbitration Association ("AAA") select the third
appraiser, and in that event the appraiser selected by the AAA shall be the
third appraiser. The termination fee shall be the amount determined by such
third appraiser, but in no event less than the lower of the two initial
appraisals or more than the higher of such two initial appraisals. Each party
shall pay the costs of the appraiser chosen by it, and each party shall pay one
half of the costs of the third appraiser. Any appraisal conducted hereunder
shall be performed no later than 45 days following selection of the appraiser or
appraisers. The Company's obligation to pay the termination fee pursuant to this
Section 15 shall survive the expiration or earlier termination of this
Agreement.
SECTION 16. Assignment; Subcontract.
-----------------------
(a) This Agreement shall terminate automatically in the event of its
assignment, in whole or in part, by the Manager, unless such assignment is
to a corporation, association, trust or other organization which shall
acquire the property and carry on the business of the Manager, if at the
time of such assignment a majority of the voting stock of such assignee
organization shall be owned, directly or indirectly, by Imperial Credit or
unless such assignment is consented to in writing by the Company with the
consent of a majority of the Independent Directors. Such an assignment
shall bind the assignee hereunder in the same manner as the Manager is
bound hereunder and, to further evidence its obligations hereunder ,the
assignee shall execute and deliver to the Company a counterpart of this
Agreement. This Agreement shall not be assignable by the Company without
the consent of the Manager, except in the case of assignment by the Company
to a REIT or other organization which is a successor (by merger,
consolidation or purchase of assets) to the Company, in which case such
successor organization shall be bound hereunder and by the terms of said
assignment in the same manner as the Company is bound hereunder.
(b) Notwithstanding the foregoing, the Company and the Manager agree
that the Manager may enter into a subcontract with any third party, which
third party shall be approved by the Company's Board of Directors, pursuant
to which such third party will provide such of the management services
required hereunder as the Manager deems necessary, and the Company hereby
consents to the entering into and performance of such subcontract;
provided, however, that no such arrangement between the Manager and any
third party shall relieve the Manager of any of its duties or obligations
hereunder.
SECTION 17. Action Upon Termination. From and after the effective date of
-----------------------
termination of this Agreement pursuant to Sections 13 or 14 hereof, the Manager
shall not be entitled to compensation for further services hereunder, but shall
be paid all compensation accruing to the date of termination and, if such
termination is not pursuant to Section 14, the termination fee determined
pursuant to Section 15 and, if applicable, the unvested Options granted to the
Manager and directors and executive officers of the Manager pursuant to Section
8(e) shall vest in the manner described in Section 8(e) and in the Company's
1997 Stock Option Plan. The Manager shall forthwith upon such termination
deliver to the Board of Directors all funds and property, documents, corporate
records, reports and software of the Company or any Subsidiary of the Company
then in the custody of Manager.
SECTION 18. Release of Money or Other Property Upon Written Request. The
-------------------------------------------------------
Manager agrees that any money or other property of the Company and its
Subsidiaries held by the Manager under this Agreement shall be held by the
Manager as custodian for the Company and its Subsidiaries, and the Manager's
records shall be
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<PAGE>
appropriately marked clearly to reflect the ownership of such money or other
property by the Company and its Subsidiaries. Upon the receipt by the Manager of
a written request signed by a duly authorized officer of the Company requesting
the Manager to release to the Company or any such Subsidiary, respectively, any
money or other property then held by the Manager for the account of the Company
or any such Subsidiary under this Agreement, the Manager shall release such
money or other property to the Company or any of its Subsidiaries within a
reasonable period of time, but in no event later than 60 days following such
request. The Manager shall not be liable to the Company, the Independent
Directors, or the Company's or any of its Subsidiaries' stockholders or partners
for any acts performed or omissions to act by the Company or any of its
Subsidiaries in connection with the money or other property released to the
Company or any of its Subsidiaries in accordance with this Section. The Company
and its Subsidiaries jointly and severally shall indemnify, defend and hold
harmless the Manager, its directors, officers, stockholders and employees
against any and all expenses, losses, damages, liabilities, demands, charges and
claims of any nature whatsoever, which arise in connection with the Manager's
release of such money or other property to the Company or any of its
Subsidiaries in accordance with the terms of this Section 17 of this Agreement.
Indemnification pursuant to this provision shall be in addition to any right of
the Manager to indemnification under Section 11 of this Agreement.
SECTION 19. Representations and Warranties.
------------------------------
(a) The Company hereby represents and warrants to the Manager as follows:
(i) Each of ICCMIC and ICMSC is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its respective
incorporation, each of them has the corporate power to own its assets and to
transact the business in which it is now engaged and is duly qualified as a
foreign corporation and in good standing under the laws of each jurisdiction
where its ownership or lease of property or the conduct of its business requires
such qualification, except for failures to be so qualified, authorized or
licensed that could not in the aggregate have a material adverse effect on the
business operations, assets or financial condition of the Company and its
Subsidiaries, taken as a whole. The Company does not do business under any
fictitious business name.
(ii) Each of ICCMIC and ICMSC has the corporate power and authority to
execute, deliver and perform this Agreement and all obligations required
hereunder and has taken all necessary corporate action to authorize this
Agreement on the terms and conditions hereof and the execution, delivery and
performance of this Agreement and all obligations required hereunder. No
consent of any other person including, without limitation, stockholders and
creditors of the Company, and no license, permit, approval or authorization of,
exemption by, notice or report to, or registration, filing or declaration with,
any governmental authority is required by the Company in connection with this
Agreement or the execution, delivery, performance, validity or enforceability of
this Agreement and all obligations required hereunder. This Agreement has been,
and each instrument or document required hereunder will be, executed and
delivered by a duly authorized officer of each of ICMIC and ICMSC, and this
Agreement constitutes, and each instrument or document required hereunder when
executed and delivered hereunder will constitute, the legally valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms.
(iii) The execution, delivery and performance of this Agreement and the
documents or instruments required hereunder will not violate any provision of
any existing law or regulation binding on ICMIC or any of its subsidiaries, or
any order, judgment, award or decree of any court, arbitrator or governmental
authority binding on ICCMIC or any of its subsidiaries, or the Governing
Instruments of, or any securities issued by ICCMIC or any of its subsidiaries,
or of any mortgage, indenture, lease, contract or other agreement, instrument or
undertaking to which ICMIC or any of its subsidiaries is a party or by which
ICMIC or any of its subsidiaries, or any of their respective assets, may be
bound, the violation of which would have a material adverse effect on the
business operations, assets or financial condition of ICMIC and its
subsidiaries, taken as a whole, and will not result in, or require, the creation
or imposition of any lien on any of its property, assets or revenues pursuant to
the provisions of any such mortgage, indenture, lease, contract or other
agreement, instrument or undertaking.
(b) The Manager hereby represents and warrants to the Company as follows:
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<PAGE>
(i) the Manager is duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation, has the corporate power
to own its assets and to transact the business in which it is now engaged and is
duly qualified to do business and is in good standing under the laws of each
jurisdiction where its ownership or lease of property or the conduct of its
business requires such qualification, except for failures to be so qualified,
authorized or licensed that could not in the aggregate have a material adverse
effect on the business operations, assets or financial condition of the Manager
and its subsidiaries, taken as a whole. The Manager does not do business under
any fictitious business name.
(ii) The Manager has the corporate power and authority to execute, deliver
and perform this Agreement and all obligations required hereunder and has taken
all necessary corporate action to authorize, execute and deliver this Agreement
and perform all obligations required hereunder. No consent of any other person
including, without limitation, stockholders and creditors of the Manager, and no
license, permit, approval or authorization of, exemption by, notice or report
to, or registration, filing or declaration with, any governmental authority is
required by the Manager in connection with this Agreement or the execution and
delivery of this Agreement and the performance all obligations required
hereunder. This Agreement has been, and each instrument or document required
hereunder will be, executed and delivered by a duly authorized agent of the
Manager, and this Agreement constitutes, and each instrument or document
required hereunder when executed and delivered hereunder will constitute, the
legally valid and binding obligation of the Manager enforceable against the
Manager in accordance with its terms.
(iii) The execution, delivery and performance of this Agreement and the
documents or instruments required hereunder will not violate any provision of
any existing law or regulation binding on the Manager, or any order, judgment,
award or decree of any court, arbitrator or governmental authority binding on
the Manager, or the Governing Instruments of, or any securities issued by, the
Manager or of any mortgage, indenture, lease, contract or other agreement,
instrument or undertaking to which the Manager is a party or by which the
Manager or any of its assets may be bound, the violation of which would have a
material adverse effect on the business operations, assets or financial
condition of the Manager and its subsidiaries, taken as a whole, and will not
result in, or require, the creation or imposition of any lien on any of its
property, assets or revenues pursuant to the provisions of any such mortgage,
indenture, lease, contract or other agreement, instrument or undertaking.
SECTION 20. Notices. Unless expressly provided otherwise herein, all
-------
notices, requests, demands and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been duly given,
made and received when delivered against receipt or upon actual receipt of
registered or certified mail, postage prepaid, return receipt requested,
addressed as set forth below:
(a) If to the Company:
Imperial Credit Commercial Mortgage Investment Corp.
c/o Imperial Credit Industries, Inc.
22550 Hawthorne Boulevard, Bldg. One, Suite 110
Torrance, California 90505
Attention: Mark S. Karlan, President
with a copy given in the manner prescribed above to:
Jay A. Shafran, Esq.
Sonnenschein Nath & Rosenthal
601 South Figueroa Street
Suite 1500
Los Angeles, California 90017
(b) If to the Manager:
Imperial Credit Asset Management Corp.
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<PAGE>
c/o Imperial Credit Industries, Inc.
22550 Hawthorne Boulevard, Bldg. One, Suite 110
Torrance, California 90505
Attention: Mark S. Karlan, President
with a copy given in the manner prescribed above to:
J. A. Shafran, Esq.
Sonnenschein Nath & Rosenthal
601 South Figueroa Street
Suite 1500
Los Angeles, California 90017
Either party may alter the address to which communications or copies are to
be sent by giving notice of such change of address in conformity with the
provisions of this Section 20 for the giving of notice.
SECTION 21. Entire Agreement. This Agreement contains the entire agreement
----------------
and understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements, understandings,
inducements and conditions, express or implied, oral or written, of any nature
whatsoever with respect to the subject matter hereof. The express terms hereof
control and supersede any course of performance and/or usage of the trade
inconsistent with any of the terms hereof. This Agreement may not be modified
or amended other than by an agreement in writing.
SECTION 22. Binding Nature of Agreement; Successors and Assigns. This
---------------------------------------------------
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, successors and assigns as
provided herein.
SECTION 23. Third Party Beneficiaries. This Agreement shall be binding
-------------------------
upon and inure solely to the benefit of the parties hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other rights or
remedies of any nature whatsoever under or by reason of this Agreement.
SECTION 24. Schedules and Exhibits. All Schedules and Exhibits referred to
----------------------
herein or attached hereto are hereby incorporated by reference into, and made a
part of, this Agreement.
SECTION 25. Indulgences, Not Waivers. Neither the failure nor any delay on
------------------------
the part of a party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence. No waiver shall be effective unless it is
in writing and is signed by the party asserted to have granted such waiver.
SECTION 26. Costs and Expenses. Each party hereto shall bear its own costs
------------------
and expenses (including the fees and disbursements of counsel and accountants)
incurred in connection with the negotiations and preparation of and the closing
under this Agreement, and all matters incidental thereto.
SECTION 27. Titles Not to Affect Interpretation. The titles of paragraphs
-----------------------------------
and subparagraphs contained in this Agreement are for convenience only, and they
neither form a part of this Agreement nor are they to be used in the
construction or interpretation hereof.
SECTION 28. Execution in Counterparts. This Agreement may be executed in
-------------------------
any number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
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<PAGE>
SECTION 29. Provisions Separable. The provisions of this Agreement are
--------------------
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
SECTION 30. Gender. Words used herein regardless of the number and gender
------
specifically used, shall be deemed and construed to include any other number,
singular or plural, and any other gender, masculine, feminine or neuter, as the
context requires.
SECTION 31. Computation of Interest. Interest will be computed on the
-----------------------
basis of a 360-day year consisting of twelve months of thirty days each.
SECTION 32. Profesional Fees. If any party becomes involved in litigation
----------------
(including bankruptcy proceedings) or arbitration against any other party
arising out of or relating to this Agreement, the court in the litigation
(including bankruptcy proceedings) or arbitrator in the arbitration shall award
legal expenses (including, but not limited to attorneys' fees, court costs and
other legal expenses) to the prevailing party. The award for legal expenses
shall not be computed in accordance with any court schedule, but shall be as
necessary to fully reimburse all attorneys' fees and other legal expenses
actually incurred in good faith, regardless of the size of the judgment, it
being the intention of the parties to fully compensate for all the attorneys'
fees and other legal expenses paid in good faith. For the purpose of this
Agreement, the terms "attorneys' fees" or "attorneys' fees and costs" shall mean
the reasonable fees and expenses of counsel to the parties hereto (including,
without limitation, the cost of in-house counsel employed by such party, such
cost to be determined by imputing a cost for those services commensurate with
such counsel's skills and experience), which may include printing, duplicating
and other expenses, air freight charges, and fees billed for law clerks,
paralegals, librarians and others not admitted to the bar but performing
services under the supervision of an attorney. The terms "attorneys' fees" or
"attorneys' fees and costs" shall also include, without limitation, all
reasonable fees and expenses incurred with respect to appeals, arbitrations and
bankruptcy proceedings, and whether or not any action or proceeding is brought
with respect to the matter for which said fees and expenses were incurred.\\
SECTION 33. Controlling Law. This Agreement and all questions relating to
---------------
its validity, interpretation, performance and enforcement shall be governed by
and construed, interpreted and enforced in accordance with the laws of the State
of California, notwithstanding any California or other conflict-of-law
provisions to the contrary.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
IMPERIAL CREDIT COMMERCIAL MORTGAGE
INVESTMENT CORP.
By:
-------------------------------
Its:
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<PAGE>
IMPERIAL CREDIT MORTGAGE SECURITIZATION
CORP.
By:
-----------------------------------
Its: ------------------------------
IMPERIAL CREDIT ASSET MANAGEMENT
CORPORATION
By:
-----------------------------------
Its: ------------------------------
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<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Imperial Credit Commercial Mortgage Investment Corp.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
KPMG Peat Marwick LLP
Los Angeles, California
July 31, 1997
