<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1998
REGISTRATION NO. 333-44299
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
AMENDMENT NO. 2 TO FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------
HELLER FINANCIAL COMMERCIAL MORTGAGE ASSET CORP.
(Exact name of registrant as specified in its charter)
----------------
DELAWARE 36-4202202
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 WEST MONROE STREET MARGARET E. GOVERN
CHICAGO, ILLINOIS 60661 C/O HELLER FINANCIAL COMMERCIAL
(312) 441-7000 MORTGAGE ASSET CORP.
------- 500 WEST MONROE STREET
CHICAGO, ILLINOIS 60661
(312) 441-7000
(Address, including zip code, (Name, address, including zip
and telephone number, including code, and telephone number, including
area code, of registrant's area code, of agent for service
principal executive offices) with respect to the Registrant)
------------------
Copies to:
KEVIN C. BLAUCH, ESQ.
LATHAM & WATKINS
885 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 906-1241
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement as
determined by market conditions and pursuant to Rule 415.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [x]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, 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 number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the Prospectus Supplement is expected to be made
pursuant to Rule 434, please check the following box. [ ]
------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
PROPOSED TITLE OF SECURITIES TO BE PRICE PER OFFERING REGISTRATION
TO BE REGISTERED REGISTERED UNIT (1) PRICE (1) FEE (2)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through
Certificates............................ $2,000,000,000 100% $2,000,000,000 $590,000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee on
the basis of the proposed maximum offering price per unit.
(2) $295.00 of which was previously filed.
------------------
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
===============================================================================
<PAGE>
EXPLANATORY NOTE
Immediately following this explanatory note there are eight sets of
six pages labeled in the upper right corner as follows: "Version 1: Multifamily
Properties", "Version 2: Office Properties", "Version 3: Retail Properties",
"Version 4: Hotel Properties", "Version 5: Health Care-Related Facilities",
"Version 6: Industrial Properties", "Version 7: Self-Storage Facilities" and
"Version 8: Manufactured Housing Communities." Each such "version" contains a
cover page to be substituted in the Prospectus and five pages with inserts to
the Prospectus and the Prospectus Supplement showing the text specific to
concentration in each of the eight types of properties contemplated by the
Registrant for purposes of the Registration Statement (i.e. multifamily
properties, office properties, retail properties, hotel properties, health
care-related facilities, industrial properties, self-storage facilities and
manufactured housing communities).
The above described eight "versions" of changes to the Prospectus
and the Prospectus Supplement are being filed with this Registration Statement
for purposes of identifying changes that will be made to the Prospectus and the
Prospectus Supplement as a result of concentrations in any specific
securitization transaction. Depending on the types of properties that involve
concentration in any particular transaction, the respective changes to the
Prospectus and the Prospectus Supplement from one or more of the above
described "versions" would be included in the Prospectus and the Prospectus
Supplement for that transaction. The Prospectus and the Prospectus Supplement
reflecting such changes would be filed at the time and in the manner provided
by Rule 424 under the Securities Act of 1933.
<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. The securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement become
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 any such State.
VERSION 1: MULTIFAMILY PROPERTIES
PROSPECTUS
HELLER FINANCIAL COMMERCIAL MORTGAGE ASSET CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
The mortgage pass-through certificates (the "Offered Certificates")
offered hereby and by supplements hereto (each, a "Prospectus Supplement") will
be offered from time to time in one or more series (each, a "Series"). The
Offered Certificates of any Series, together with any other mortgage
pass-through certificates of such Series, are collectively referred to herein
as the "Certificates". Each Series of Certificates will represent in the
aggregate the entire beneficial ownership interest in a trust fund (with
respect to any Series, the "Trust Fund") consisting of one or more segregated
pools of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage participations, mortgage pass-through certificates
or other mortgage-backed securities evidencing interests in or secured by
multifamily or commercial mortgage loans (collectively, the "CMBS") or a
combination of Mortgage Loans and/or CMBS (with respect to any Series,
collectively, the "Mortgage Assets"). Multifamily properties consisting of five
or more rental or cooperatively owned dwellings will represent security for a
material concentration of the Mortgage Loans (or the mortgage loans underlying
the CMBS) in any Trust Fund, based on principal balance at the time such Trust
Fund is formed. If so specified in the related Prospectus Supplement, some or
all of the Mortgage Loans will include assignments of the leases of the related
Mortgaged Properties (as defined herein) and/or assignments of the rental
payments due from the lessees under such leases (each type of assignment, a
"Lease Assignment"). A significant or the sole source of payments on certain
Commercial Loans (as defined herein) and, therefore, of distributions on
certain Series of Certificates, will be such rental payments. If so specified
in the related Prospectus Supplement, the Trust Fund for a Series of
Certificates may include letters of credit, insurance policies, guarantees,
reserve funds or other types of credit support, or any combination thereof
(with respect to any Series, collectively, "Credit Support"), and currency or
interest rate exchange agreements and other financial assets, or any
combination thereof (with respect to any Series, collectively, "Cash Flow
Agreements"). See "Description of the Trust Funds," "Description of the
Certificates" and "Description of Credit Support."
Retain this Prospectus for future reference. This Prospectus may
not be used to consummate sales of the Offered Certificates of any Series
unless accompanied by the Prospectus Supplement for such Series.
(cover continued on next page)
--------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE CERTIFICATES OF EACH SERIES WILL NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, ANY MASTER SERVICER, ANY
SPECIAL SERVICER, THE TRUSTEE, THE UNDERWRITER OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR ANY ASSETS IN THE RELATED TRUST
FUND WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY OR BY ANY OTHER PERSON, EXCEPT TO THE EXTENT PROVIDED
IN THE RELATED PROSPECTUS SUPPLEMENT. THE ASSETS IN EACH TRUST
FUND WILL BE HELD IN TRUST FOR THE BENEFIT OF THE HOLDERS OF THE
RELATED SERIES OF CERTIFICATES PURSUANT TO A POOLING AND SERVICING
AGREEMENT OR A TRUST AGREEMENT, AS MORE FULLY DESCRIBED HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 17 HEREIN AND SUCH INFORMATION AS
MAY BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS
SUPPLEMENT BEFORE PURCHASING ANY OFFERED CERTIFICATE.
Prior to issuance there will have been no market for the
Certificates of any Series and there can be no assurance that a secondary
market for any Offered Certificates will develop or that, if it does develop,
it will continue. This Prospectus may not be used to consummate sales of the
Offered Certificates of any Series unless accompanied by the Prospectus
Supplement for such Series.
Offers of the Offered Certificates may be made through one or more
different methods, including offerings through underwriters as more fully
described under "Method of Distribution" herein and the related Prospectus
Supplement."
--------------
THE DATE OF THIS PROSPECTUS IS , 199
<PAGE>
VERSION 1: MULTIFAMILY PROPERTIES
[The following to be inserted on PAGE ii of the PROSPECTUS SUPPLEMENT,
immediately following the second sentence of the first paragraph:]
Multifamily properties consisting of five or more rental or cooperatively owned
dwellings will represent security for a material concentration of the Mortgage
Loans in any Trust Fund, based on principal balance at the time such Trust Fund
is formed.
<PAGE>
VERSION 1: MULTIFAMILY PROPERTIES
[The following to be inserted in the TABLE OF CONTENTS of the PROSPECTUS,
immediately following "RISK FACTORS-RISKS ASSOCIATED WITH MORTGAGE LOANS AND
MORTGAGED PROPERTIES":]
Risks Particular to Multifamily Rental Properties....................[page no.]
<PAGE>
VERSION 1: MULTIFAMILY PROPERTIES
[The following to be inserted in the TABLE OF CONTENTS of the PROSPECTUS
SUPPLEMENT, immediately following "DESCRIPTION OF THE MORTGAGE POOL-GENERAL":]
Mortgage Loans Secured by Multifamily Rental Properties..............[page no.]
<PAGE>
VERSION 1: MULTIFAMILY PROPERTIES
[The following to be inserted in the PROSPECTUS under "RISK FACTORS,"
immediately following "RISKS ASSOCIATED WITH MORTGAGE LOANS AND MORTGAGED
PROPERTIES" and in the PROSPECTUS SUPPLEMENT under "RISK FACTORS," immediately
following "RISKS ASSOCIATED WITH CERTAIN OF THE MORTGAGE LOANS AND MORTGAGED
PROPERTIES":]
RISKS PARTICULAR TO MULTIFAMILY RENTAL PROPERTIES
Multifamily projects are part of a market that, in general, is
characterized by low barriers to entry. Thus, a particular apartment market
with historically low vacancies could experience substantial new construction,
and a resultant oversupply of units, in a relatively short period of time.
Since multifamily apartment units are typically leased on a short-term basis,
the tenants who reside in a particular project within such a market may easily
move to newer projects with better amenities. Adverse economic conditions,
either local or national, may limit the amount of rent that can be charged for
rental units, and may result in a reduction in timely rent payments or a
reduction in occupancy levels without a corresponding decrease in expenses.
Occupancy and rent levels may also be affected by local military base closings
and national and local politics, including, in the case of multifamily rental
properties, current or future rent stabilization and rent control laws and
agreements. In addition, the level of mortgage interest rates may encourage
tenants in multifamily rental properties to purchase single-family housing.
Further, the cost of operating a multifamily property may increase, including
the cost of utilities and the costs of required capital expenditures.
Furthermore, the rent limitations imposed on Mortgaged Properties eligible to
receive low-income housing tax credits pursuant to Section 42 of the Code
("Section 42 Properties") may adversely affect the ability of the applicable
borrowers to increase rents to maintain such Mortgaged Properties in proper
condition during periods of rapid inflation or declining market value of such
Mortgaged Properties. In addition, the income restrictions on tenants imposed
by Section 42 of the Code may reduce the number of eligible tenants in such
Mortgaged Properties and result in a reduction in occupancy rates applicable
thereto. Furthermore, some eligible tenants may not find any differences in
rents between the Section 42 Properties and other multifamily rental properties
in the same area to be a sufficient economic incentive to reside at a Section
42 Property, which may have fewer amenities or otherwise be less attractive as
a residence. Additionally, the characteristics of a neighborhood may change
over time or in relation to newer developments. All of these conditions and
events may increase the possibility that a borrower may be unable to meet its
obligations under its Mortgage Loan.
<PAGE>
VERSION 1: MULTIFAMILY PROPERTIES
[The following to be inserted in the PROSPECTUS under "DESCRIPTION OF THE TRUST
FUNDS," immediately following "MORTGAGE LOANS--GENERAL" and in the PROSPECTUS
SUPPLEMENT under "DESCRIPTION OF THE MORTGAGE POOL," immediately following
"GENERAL":]
MORTGAGE LOANS SECURED BY MULTIFAMILY RENTAL PROPERTIES
Significant factors determining the value and successful operation
of a multifamily property are the location of the property, the number of
competing residential developments in the local market (such as apartment
buildings, manufactured housing communities and site-built single family
homes), the physical attributes of the multifamily apartment building (such as
its age and appearance) and state and local regulations affecting such
property. In addition, the successful operation of an apartment building will
depend upon other factors such as its reputation, the ability of management to
provide adequate maintenance and insurance, and the types of services it
provides.
Certain states regulate the relationship of an owner and its
tenants. Commonly, these laws require a written lease, good cause for eviction,
disclosure of fees, and notification to residents of changed land use, while
prohibiting unreasonable rules, retaliatory evictions, and restrictions on a
resident's choice of unit vendors. Apartment building owners have been the
subject of suits under state "Unfair and Deceptive Practices Acts" and other
general consumer protection statutes for coercive, abusive or unconscionable
leasing and sales practices. A few states offer more significant protection.
For example, there are provisions that limit the basis on which a landlord may
terminate a tenancy or increase its rent or prohibit a landlord from
terminating a tenancy solely by reason of the sale of the owner's building.
In addition to state regulation of the landlord-tenant
relationship, numerous counties and municipalities impose rent control on
apartment buildings. These ordinances may limit rent increases to fixed
percentages, to percentages of increases in the consumer price index, to
increases set or approved by a governmental agency, or to increases determined
through mediation or binding arbitration. In many cases, the rent control laws
do not permit vacancy decontrol. Local authority to impose rent control is
pre-empted by state law in certain states, and rent control is not imposed at
the state level in those states. In some states, however, local rent control
ordinances are not pre-empted for tenants having short-term or month-to-month
leases, and properties there may be subject to various forms of rent control
with respect to those tenants. Any limitations on a borrower's ability to raise
property rents may impair such borrower's ability to repay its Mortgage Loan
from its net operating income or the proceeds of a sale or refinancing of the
related Mortgaged Property.
Adverse economic conditions, either local or national, may limit
the amount of rent that can be charged and may result in a reduction in timely
rent payments or a reduction in occupancy levels. Occupancy and rent levels may
also be affected by construction of additional housing units, local military
base closings and national and local politics, including current or future rent
stabilization and rent control laws and agreements. In addition, the level of
mortgage interest rates may encourage tenants to purchase single-family
housing. The location and construction quality of a particular building may
affect the occupancy level as well as the rents that may be charged for
individual units. The characteristics of a neighborhood may change over time or
in relation to newer developments.
<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. The securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement become
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 any such State.
VERSION 2: OFFICE PROPERTIES
PROSPECTUS
HELLER FINANCIAL COMMERCIAL MORTGAGE ASSET CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
The mortgage pass-through certificates (the "Offered Certificates")
offered hereby and by supplements hereto (each, a "Prospectus Supplement") will
be offered from time to time in one or more series (each, a "Series"). The
Offered Certificates of any Series, together with any other mortgage
pass-through certificates of such Series, are collectively referred to herein
as the "Certificates". Each Series of Certificates will represent in the
aggregate the entire beneficial ownership interest in a trust fund (with
respect to any Series, the "Trust Fund") consisting of one or more segregated
pools of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage participations, mortgage pass-through certificates
or other mortgage-backed securities evidencing interests in or secured by
multifamily or commercial mortgage loans (collectively, the "CMBS") or a
combination of Mortgage Loans and/or CMBS (with respect to any Series,
collectively, the "Mortgage Assets"). Office buildings will represent security
for a material concentration of the Mortgage Loans (or the mortgage loans
underlying the CMBS) in any Trust Fund, based on principal balance at the time
such Trust Fund is formed. If so specified in the related Prospectus
Supplement, some or all of the Mortgage Loans will include assignments of the
leases of the related Mortgaged Properties (as defined herein) and/or
assignments of the rental payments due from the lessees under such leases (each
type of assignment, a "Lease Assignment"). A significant or the sole source of
payments on certain Commercial Loans (as defined herein) and, therefore, of
distributions on certain Series of Certificates, will be such rental payments.
If so specified in the related Prospectus Supplement, the Trust Fund for a
Series of Certificates may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support, or any combination
thereof (with respect to any Series, collectively, "Credit Support"), and
currency or interest rate exchange agreements and other financial assets, or
any combination thereof (with respect to any Series, collectively, "Cash Flow
Agreements"). See "Description of the Trust Funds," "Description of the
Certificates" and "Description of Credit Support."
Retain this Prospectus for future reference. This Prospectus may
not be used to consummate sales of the Offered Certificates of any Series
unless accompanied by the Prospectus Supplement for such Series.
(cover continued on next page)
--------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE CERTIFICATES OF EACH SERIES WILL NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, ANY MASTER SERVICER, ANY
SPECIAL SERVICER, THE TRUSTEE, THE UNDERWRITER OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR ANY ASSETS IN THE RELATED TRUST
FUND WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY OR BY ANY OTHER PERSON, EXCEPT TO THE EXTENT PROVIDED
IN THE RELATED PROSPECTUS SUPPLEMENT. THE ASSETS IN EACH TRUST
FUND WILL BE HELD IN TRUST FOR THE BENEFIT OF THE HOLDERS OF THE
RELATED SERIES OF CERTIFICATES PURSUANT TO A POOLING AND SERVICING
AGREEMENT OR A TRUST AGREEMENT, AS MORE FULLY DESCRIBED HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 17 HEREIN AND SUCH INFORMATION AS
MAY BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS
SUPPLEMENT BEFORE PURCHASING ANY OFFERED CERTIFICATE.
Prior to issuance there will have been no market for the
Certificates of any Series and there can be no assurance that a secondary
market for any Offered Certificates will develop or that, if it does develop,
it will continue. This Prospectus may not be used to consummate sales of the
Offered Certificates of any Series unless accompanied by the Prospectus
Supplement for such Series.
Offers of the Offered Certificates may be made through one or more
different methods, including offerings through underwriters as more fully
described under "Method of Distribution" herein and the related Prospectus
Supplement."
--------------
THE DATE OF THIS PROSPECTUS IS , 199
<PAGE>
VERSION 2: OFFICE PROPERTIES
[The following to be inserted on page ii of the PROSPECTUS SUPPLEMENT,
immediately following the second sentence of the first paragraph:]
Office buildings will represent security for a material concentration of the
Mortgage Loans in any Trust Fund, based on principal balance at the time such
Trust Fund is formed.
<PAGE>
VERSION 2: OFFICE PROPERTIES
[The following to be inserted in the TABLE OF CONTENTS of the PROSPECTUS,
immediately following "RISK FACTORS--RISKS ASSOCIATED WITH MORTGAGE LOANS AND
MORTGAGED PROPERTIES":]
Risks Particular to Office Properties................................[page no.]
<PAGE>
VERSION 2: OFFICE PROPERTIES
[The following to be inserted in the TABLE OF CONTENTS of the PROSPECTUS
SUPPLEMENT, immediately following "DESCRIPTION OF THE MORTGAGE POOL--GENERAL":]
Mortgage Loans Secured by Office Properties..........................[page no.]
<PAGE>
VERSION 2: OFFICE PROPERTIES
[The following to be inserted in the PROSPECTUS under "RISK FACTORS,"
immediately following "RISKS ASSOCIATED WITH MORTGAGE LOANS AND MORTGAGED
PROPERTIES" and in the PROSPECTUS SUPPLEMENT under "RISK FACTORS," immediately
following "RISKS ASSOCIATED WITH CERTAIN OF THE MORTGAGE LOANS AND MORTGAGED
PROPERTIES":]
RISKS PARTICULAR TO OFFICE PROPERTIES
Office properties generally require their owners to expend
significant amounts of cash to pay for general capital improvements, tenant
improvements and costs of re-leasing space. Office properties that are not
equipped to accommodate the needs of modern businesses may become functionally
obsolete and thus non-competitive. In addition to risks generally associated
with real estate, Mortgage Loans secured by office properties are also affected
significantly by adverse changes in population and employment growth (which
creates demand for office space), local competitive conditions (such as the
supply of office space or the existence or construction of new competitive
office buildings), the quality and management philosophy of management, the
attractiveness of the properties to tenants and their customers or clients, the
attractiveness of the surrounding neighborhood and the need to make major
repairs or improvements to satisfy the needs of major tenants. In addition,
office properties may be adversely affected by an economic decline in the
business operated by their tenants. Such decline may result in one or more
significant tenants ceasing operations at such locations (which may occur on
account of a voluntary decision not to renew a lease, bankruptcy or insolvency
of such tenants, such tenants' general cessation of business activities or for
other reasons). If office properties have a single tenant or if there is a
significant concentration of tenants in a particular business or industry, the
risk of such an economic decline increases.
<PAGE>
VERSION 2: OFFICE PROPERTIES
[The following to be inserted in the PROSPECTUS under "DESCRIPTION OF THE TRUST
FUNDS," immediately following "MORTGAGE LOANS--GENERAL" and in the PROSPECTUS
SUPPLEMENT under "DESCRIPTION OF THE MORTGAGE POOL," immediately following
"GENERAL":]
MORTGAGE LOANS SECURED BY OFFICE PROPERTIES
Significant factors affecting the value of office properties
include, without limitation, the quality of the tenants in the building, the
physical attributes of the building in relation to competing buildings, the
location of the building with respect to the central business district or
population centers, demographic trends within the metropolitan area to move
away from or towards the central business district, social trends combined with
space management trends (which may change towards options such as telecommuting
or hoteling to satisfy space needs), tax incentives offered to businesses by
cities or suburbs adjacent to or near the city where the building is located
and the strength and stability of the market area as a desirable business
location. Office properties may be adversely affected by an economic decline in
the business operated by their tenants. If office properties have a single
tenant or if there is a significant concentration of tenants in a particular
business or industry, the risk of such an economic decline increases.
Office properties are also subject to competition with other office
properties in the same market. Competition is affected by a building's age,
condition, design (including floor sizes and layout), access to transportation,
availability of parking and ability to offer certain amenities to its tenants
(including sophisticated building systems, such as fiberoptic cables, satellite
communications or other base building technological features).
The success of an office property also depends on the local
economy. Factors such as labor cost and quality, tax environment and such
quality of life matters as schools and cultural amenities are generally
considered in the decision of a business to locate its headquarters in a
particular area. A central business district may have a substantially different
economy from that of a suburb. The local economy will affect an office
property's ability to attract stable tenants on a consistent basis. In
addition, the cost of refitting office space for a new tenant is often higher
than for other property types.
<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. The securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement become
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 any such State.
VERSION 3: RETAIL PROPERTIES
PROSPECTUS
HELLER FINANCIAL COMMERCIAL MORTGAGE ASSET CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
The mortgage pass-through certificates (the "Offered Certificates")
offered hereby and by supplements hereto (each, a "Prospectus Supplement") will
be offered from time to time in one or more series (each, a "Series"). The
Offered Certificates of any Series, together with any other mortgage
pass-through certificates of such Series, are collectively referred to herein
as the "Certificates". Each Series of Certificates will represent in the
aggregate the entire beneficial ownership interest in a trust fund (with
respect to any Series, the "Trust Fund") consisting of one or more segregated
pools of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage participations, mortgage pass-through certificates
or other mortgage-backed securities evidencing interests in or secured by
multifamily or commercial mortgage loans (collectively, the "CMBS") or a
combination of Mortgage Loans and/or CMBS (with respect to any Series,
collectively, the "Mortgage Assets"). Retail properties will represent security
for a material concentration of the Mortgage Loans (or the mortgage loans
underlying the CMBS) in any Trust Fund, based on principal balance at the time
such Trust Fund is formed. If so specified in the related Prospectus
Supplement, some or all of the Mortgage Loans will include assignments of the
leases of the related Mortgaged Properties (as defined herein) and/or
assignments of the rental payments due from the lessees under such leases (each
type of assignment, a "Lease Assignment"). A significant or the sole source of
payments on certain Commercial Loans (as defined herein) and, therefore, of
distributions on certain Series of Certificates, will be such rental payments.
If so specified in the related Prospectus Supplement, the Trust Fund for a
Series of Certificates may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support, or any combination
thereof (with respect to any Series, collectively, "Credit Support"), and
currency or interest rate exchange agreements and other financial assets, or
any combination thereof (with respect to any Series, collectively, "Cash Flow
Agreements"). See "Description of the Trust Funds," "Description of the
Certificates" and "Description of Credit Support."
Retain this Prospectus for future reference. This Prospectus may
not be used to consummate sales of the Offered Certificates of any Series
unless accompanied by the Prospectus Supplement for such Series.
(cover continued on next page)
--------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE CERTIFICATES OF EACH SERIES WILL NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, ANY MASTER SERVICER, ANY
SPECIAL SERVICER, THE TRUSTEE, THE UNDERWRITER OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR ANY ASSETS IN THE RELATED TRUST
FUND WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY OR BY ANY OTHER PERSON, EXCEPT TO THE EXTENT PROVIDED
IN THE RELATED PROSPECTUS SUPPLEMENT. THE ASSETS IN EACH TRUST
FUND WILL BE HELD IN TRUST FOR THE BENEFIT OF THE HOLDERS OF
THE RELATED SERIES OF CERTIFICATES PURSUANT TO A POOLING AND
SERVICING AGREEMENT OR A TRUST AGREEMENT, AS MORE FULLY
DESCRIBED HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 17 HEREIN AND SUCH INFORMATION AS
MAY BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS
SUPPLEMENT BEFORE PURCHASING ANY OFFERED CERTIFICATE.
Prior to issuance there will have been no market for the
Certificates of any Series and there can be no assurance that a secondary
market for any Offered Certificates will develop or that, if it does develop,
it will continue. This Prospectus may not be used to consummate sales of the
Offered Certificates of any Series unless accompanied by the Prospectus
Supplement for such Series.
Offers of the Offered Certificates may be made through one or more
different methods, including offerings through underwriters as more fully
described under "Method of Distribution" herein and the related Prospectus
Supplement."
--------------
THE DATE OF THIS PROSPECTUS IS , 199
<PAGE>
VERSION 3: RETAIL PROPERTIES
[The following to be inserted on PAGE ii of the PROSPECTUS SUPPLEMENT,
immediately following the second sentence of the first paragraph:]
Retail properties will represent security for a material concentration of the
Mortgage Loans in any Trust Fund, based on principal balance at the time such
Trust Fund is formed.
<PAGE>
VERSION 3: RETAIL PROPERTIES
[The following to be inserted in the TABLE OF CONTENTS of the PROSPECTUS,
immediately following "RISK FACTORS--RISKS ASSOCIATED WITH MORTGAGE LOANS AND
MORTGAGED PROPERTIES":]
Risks Particular to Retail Properties................................[page no.]
<PAGE>
VERSION 3: RETAIL PROPERTIES
[The following to be inserted in the TABLE OF CONTENTS of the PROSPECTUS
SUPPLEMENT, immediately following "DESCRIPTION OF THE MORTGAGE POOL--GENERAL":]
Mortgage Loans Secured by Retail Properties......................... [page no.]
<PAGE>
VERSION 3: RETAIL PROPERTIES
[The following to be inserted in the PROSPECTUS under "RISK FACTORS,"
immediately following "RISKS ASSOCIATED WITH MORTGAGE LOANS AND MORTGAGED
PROPERTIES" and in the PROSPECTUS SUPPLEMENT under "RISK FACTORS," immediately
following "RISKS ASSOCIATED WITH CERTAIN OF THE MORTGAGE LOANS AND MORTGAGED
PROPERTIES":]
RISKS PARTICULAR TO RETAIL PROPERTIES
In addition to risks generally associated with real estate,
Mortgage Loans secured by retail properties are also affected significantly by
adverse changes in consumer spending patterns, local competitive conditions
(such as the supply of retail space or the existence or construction of new
competitive shopping centers or shopping malls), alternative forms of retailing
(such as direct mail, video shopping networks and selling through the Internet
which reduce the need for retail space by retail companies), the quality and
management philosophy of management, the attractiveness of the properties and
the surrounding neighborhood to tenants and their customers, the public
perception of the safety of customers at shopping malls and shopping centers,
and the need to make major repairs or improvements to satisfy the needs of
major tenants.
Retail properties may be adversely affected if a significant tenant
ceases operations at such locations (which may occur on account of a voluntary
decision not to renew a lease, bankruptcy or insolvency of such tenant, such
tenant's general cessation of business activities or for other reasons).
Significant tenants at a retail property play an important part in generating
customer traffic and making a retail property a desirable location for other
tenants at such property. In addition, certain tenants at retail properties may
be entitled to terminate their leases if an anchor tenant ceases operations at
such property. In such cases, there can be no assurance that any such anchor
tenants will continue to occupy space in the related shopping centers.
<PAGE>
VERSION 3: RETAIL PROPERTIES
[The following to be inserted in the PROSPECTUS under "DESCRIPTION OF THE TRUST
FUNDS," immediately following "MORTGAGE LOANS--GENERAL" and in the PROSPECTUS
SUPPLEMENT under "DESCRIPTION OF THE MORTGAGE POOL," immediately following
"GENERAL":]
MORTGAGE LOANS SECURED BY RETAIL PROPERTIES
Retail properties generally derive all or a substantial percentage
of their income from lease payments from commercial tenants. Income from and
the market value of retail properties is dependent on various factors
including, but not limited to, the ability to lease space in such properties,
the ability of tenants to meet their lease obligations, the possibility of a
significant tenant becoming a debtor in a bankruptcy case under the Bankruptcy
Code, as well as fundamental aspects of real estate such as location and market
demographics.
The correlation between the success of tenant businesses and
property value is more direct with respect to retail properties than other
types of commercial property because a significant component of the total rent
paid by retail tenants is often tied to a percentage of gross sales. Declines
in sales of tenants of retail properties will likely cause a corresponding
decline in percentage rents and such tenants may become unable to pay their
rent or other occupancy costs. The default by a tenant under its lease could
result in delays and costs in enforcing the lessor's rights. Repayment of the
related mortgage loans will be affected by the expiration of space leases and
the ability of the respective borrowers to renew or relet the space on
comparable terms. Even if vacated space is successfully relet, the costs
associated with reletting, including tenant improvements, leasing commissions
and free rent, could be substantial and could reduce cash flow from the retail
properties.
Whether a retail property is "anchored" or "unanchored" is also a
relevant factor. Generally, retail properties that are anchored are perceived
to be less risky. A retail anchor tenant is normally understood to be
proportionately large in size and vital in attracting customers to the
property. Furthermore, the correlation between the success of tenant businesses
and property value is increased when the property is a single tenant property.
Unlike office or hotel properties, retail properties also face
competition from sources outside a given real estate market. Catalogue
retailers, home shopping networks, telemarketing, selling through the Internet,
and outlet centers all compete with more traditional retail properties for
consumer dollars. Continued growth of these alternative retail outlets (which
are often characterized by lower operating costs) could adversely affect the
rents collectible at retail properties.
<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. The securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement become
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 any such State.
VERSION 4: HOTEL PROPERTIES
PROSPECTUS
HELLER FINANCIAL COMMERCIAL MORTGAGE ASSET CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
The mortgage pass-through certificates (the "Offered Certificates")
offered hereby and by supplements hereto (each, a "Prospectus Supplement") will
be offered from time to time in one or more series (each, a "Series"). The
Offered Certificates of any Series, together with any other mortgage
pass-through certificates of such Series, are collectively referred to herein
as the "Certificates". Each Series of Certificates will represent in the
aggregate the entire beneficial ownership interest in a trust fund (with
respect to any Series, the "Trust Fund") consisting of one or more segregated
pools of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage participations, mortgage pass-through certificates
or other mortgage-backed securities evidencing interests in or secured by
multifamily or commercial mortgage loans (collectively, the "CMBS") or a
combination of Mortgage Loans and/or CMBS (with respect to any Series,
collectively, the "Mortgage Assets"). Hotel properties will represent security
for a material concentration of the Mortgage Loans (or the mortgage loans
underlying the CMBS) in any Trust Fund, based on principal balance at the time
such Trust Fund is formed. If so specified in the related Prospectus
Supplement, some or all of the Mortgage Loans will include assignments of the
leases of the related Mortgaged Properties (as defined herein) and/or
assignments of the rental payments due from the lessees under such leases (each
type of assignment, a "Lease Assignment"). A significant or the sole source of
payments on certain Commercial Loans (as defined herein) and, therefore, of
distributions on certain Series of Certificates, will be such rental payments.
If so specified in the related Prospectus Supplement, the Trust Fund for a
Series of Certificates may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support, or any combination
thereof (with respect to any Series, collectively, "Credit Support"), and
currency or interest rate exchange agreements and other financial assets, or
any combination thereof (with respect to any Series, collectively, "Cash Flow
Agreements"). See "Description of the Trust Funds," "Description of the
Certificates" and "Description of Credit Support."
Retain this Prospectus for future reference. This Prospectus may
not be used to consummate sales of the Offered Certificates of any Series
unless accompanied by the Prospectus Supplement for such Series.
(cover continued on next page)
--------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE CERTIFICATES OF EACH SERIES WILL NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, ANY MASTER SERVICER, ANY
SPECIAL SERVICER, THE TRUSTEE, THE UNDERWRITER OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR ANY ASSETS IN THE RELATED TRUST
FUND WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY OR BY ANY OTHER PERSON, EXCEPT TO THE EXTENT PROVIDED
IN THE RELATED PROSPECTUS SUPPLEMENT. THE ASSETS IN EACH TRUST
FUND WILL BE HELD IN TRUST FOR THE BENEFIT OF THE HOLDERS OF
THE RELATED SERIES OF CERTIFICATES PURSUANT TO A POOLING AND
SERVICING AGREEMENT OR A TRUST AGREEMENT, AS MORE FULLY
DESCRIBED HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 17 HEREIN AND SUCH INFORMATION AS
MAY BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS
SUPPLEMENT BEFORE PURCHASING ANY OFFERED CERTIFICATE.
Prior to issuance there will have been no market for the
Certificates of any Series and there can be no assurance that a secondary
market for any Offered Certificates will develop or that, if it does develop,
it will continue. This Prospectus may not be used to consummate sales of the
Offered Certificates of any Series unless accompanied by the Prospectus
Supplement for such Series.
Offers of the Offered Certificates may be made through one or more
different methods, including offerings through underwriters as more fully
described under "Method of Distribution" herein and the related Prospectus
Supplement."
--------------
THE DATE OF THIS PROSPECTUS IS , 199
<PAGE>
VERSION 4: HOTEL PROPERTIES
[The following to be inserted on PAGE ii of the PROSPECTUS SUPPLEMENT,
immediately following the second sentence of the first paragraph:]
Hotel properties will represent security for a material concentration of the
Mortgage Loans in any Trust Fund, based on principal balance at the time such
Trust Fund is formed.
<PAGE>
VERSION 4: HOTEL PROPERTIES
[The following to be inserted in the TABLE OF CONTENTS of the PROSPECTUS,
immediately following "RISK FACTORS--RISKS ASSOCIATED WITH MORTGAGE LOANS AND
MORTGAGED PROPERTIES":]
Risks Particular to Hotel Properties.................................[page no.]
<PAGE>
VERSION 4: HOTEL PROPERTIES
[The following to be inserted in the TABLE OF CONTENTS of the PROSPECTUS
SUPPLEMENT, immediately following "DESCRIPTION OF THE MORTGAGE POOL--GENERAL":]
Mortgage Loans Secured by Hotel Properties...........................[page no.]
<PAGE>
VERSION 4: HOTEL PROPERTIES
[The following to be inserted in the PROSPECTUS under "RISK FACTORS,"
immediately following "RISKS ASSOCIATED WITH MORTGAGE LOANS AND MORTGAGED
PROPERTIES" and in the PROSPECTUS SUPPLEMENT under "RISK FACTORS," immediately
following "RISKS ASSOCIATED WITH CERTAIN OF THE MORTGAGE LOANS AND MORTGAGED
PROPERTIES":]
RISKS PARTICULAR TO HOTEL PROPERTIES
Various factors, including location, quality and franchise
affiliation, if any, affect the economic viability of a hotel. Like any income
producing property, the income generated by a hotel property is subject to
several factors such as local, regional and national economic conditions and
competition. Adverse economic conditions, either local, regional or national,
may limit the amount that can be charged for a room and may result in a
reduction in occupancy levels. The construction of competing hotels or motels
can have similar effects. Because hotel property income is primarily generated
by room occupancy and such occupancy is usually for short periods of time, the
level of such income may respond more quickly to adverse conditions such as
those described above. This daily mark-to-market also accentuates the highs and
lows of economic cycles. Moreover, as a result of relatively high operating
costs, relatively small decreases in revenue can cause significant stress on a
property's cash flow. Also, sensitivity to competition may require more
frequent improvements and renovations than other properties. Furthermore, the
financial strength and capabilities of the owner and operator of a hotel may
have an impact on such hotel's quality of service and economic viability.
Finally, the hotel industry is generally seasonal. This will result in
fluctuation in the income generated by hotel properties.
To the extent a hotel is affiliated to, or associated with, a
regional, national or international chain, changes in the public perception of
such chain may have an impact on the income generated by the related property.
The viability of any hotel property which is affiliated with a franchise
depends in part on the continued existence and financial strength of the
franchisor, the public perception of the franchise service mark and the
duration of the franchise licensing agreements. The transferability of
franchise license agreements may be restricted, and in the event of a
foreclosure on any hotel property, the purchaser of such hotel property would
not have the right to use the franchise license without the franchisor's
consent. Further, in the event of a foreclosure on a hotel property, it is
unlikely that the Trustee (or Master Servicer) or purchaser of such hotel
property would be entitled to the rights under any liquor license. Conversely,
a lender may be unable to remove a franchisor that it desires to replace
following a foreclosure.
<PAGE>
VERSION 4: HOTEL PROPERTIES
[The following to be inserted in the PROSPECTUS under "DESCRIPTION OF THE TRUST
FUNDS," immediately following "MORTGAGE LOANS--GENERAL" and in the PROSPECTUS
SUPPLEMENT under "DESCRIPTION OF THE MORTGAGE POOL," immediately following
"GENERAL":]
MORTGAGE LOANS SECURED BY HOTEL PROPERTIES
Hotel properties may involve different types of hotels, including
full service hotels, limited service hotels, hotels associated with national
franchise chains, hotels associated with regional franchise chains and hotels
that are not affiliated with any franchise chain but may have their own brand
identity. Various factors, including location, quality and franchise
affiliation affect the economic performance of a hotel. Adverse economic
conditions, either local, regional or national, may limit the amount that can
be charged for a room and may result in a reduction in occupancy levels. The
construction of competing hotels can have similar effects. To meet competition
in the industry and to maintain economic values, continuing expenditures must
be made for modernizing, refurbishing, and maintaining existing facilities
prior to the expiration of their anticipated useful lives. Because hotel rooms
generally are rented for short periods of time, hotels tend to respond more
quickly to adverse economic conditions and competition than do other commercial
properties. Furthermore, the financial strength and capabilities of the owner
and operator of a hotel may have an impact on such hotel's quality of service
and economic performance. Additionally, the hotel and lodging industry is
generally seasonal in nature and this seasonality can be expected to cause
periodic fluctuations in room and other revenues, occupancy levels, room rates
and operating expenses. The demand for particular accommodations may also be
affected by changes in travel patterns caused by changes in energy prices,
strikes, relocation of highways, the construction of additional highways and
other factors.
The viability of any hotel property that is a franchise of a
national or a regional hotel chain depends in part on the continued existence
and financial strength of the franchisor, the public perception of the
franchise service mark and the duration of the franchise licensing agreement.
The transferability of franchise license agreements may be restricted and, in
the event of a foreclosure on any such hotel property, the consent of the
franchisor for the continued use the franchise license by the hotel property
would be required. Conversely, a lender may be unable to remove a franchisor
that it desires to replace following a foreclosure. Further, in the event of a
foreclosure on a hotel property, it is unlikely that the purchaser (or the
trustee, servicer or special servicer, as the case may be) of such hotel
property may be entitled to the rights under any liquor license for such hotel
property, and such party would be required to apply in its own right for such
license or licenses. There can be no assurance that a new license could be
obtained or that it could be obtained promptly.
<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. The securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement become
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 any such State.
VERSION 5: HEALTH CARE-RELATED FACILITIES
PROSPECTUS
HELLER FINANCIAL COMMERCIAL MORTGAGE ASSET CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
The mortgage pass-through certificates (the "Offered Certificates")
offered hereby and by supplements hereto (each, a "Prospectus Supplement") will
be offered from time to time in one or more series (each, a "Series"). The
Offered Certificates of any Series, together with any other mortgage
pass-through certificates of such Series, are collectively referred to herein
as the "Certificates". Each Series of Certificates will represent in the
aggregate the entire beneficial ownership interest in a trust fund (with
respect to any Series, the "Trust Fund") consisting of one or more segregated
pools of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage participations, mortgage pass-through certificates
or other mortgage-backed securities evidencing interests in or secured by
multifamily or commercial mortgage loans (collectively, the "CMBS") or a
combination of Mortgage Loans and/or CMBS (with respect to any Series,
collectively, the "Mortgage Assets"). Health care-related facilities will
represent security for a material concentration of the Mortgage Loans (or the
mortgage loans underlying the CMBS) in any Trust Fund, based on principal
balance at the time such Trust Fund is formed. If so specified in the related
Prospectus Supplement, some or all of the Mortgage Loans will include
assignments of the leases of the related Mortgaged Properties (as defined
herein) and/or assignments of the rental payments due from the lessees under
such leases (each type of assignment, a "Lease Assignment"). A significant or
the sole source of payments on certain Commercial Loans (as defined herein)
and, therefore, of distributions on certain Series of Certificates, will be
such rent payments. If so specified in the related Prospectus Supplement, the
Trust Fund for a Series of Certificates may include letters of credit,
insurance policies, guarantees, reserve funds or other types of credit support,
or any combination thereof (with respect to any Series, collectively, "Credit
Support"), and currency or interest rate exchange agreements and other
financial assets, or any combination thereof (with respect to any Series,
collectively, "Cash Flow Agreements"). See "Description of the Trust Funds,"
"Description of the Certificates" and "Description of Credit Support."
Retain this Prospectus for future reference. This Prospectus may
not be used to consummate sales of the Offered Certificates of any Series
unless accompanied by the Prospectus Supplement for such Series.
(cover continued on next page)
--------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE CERTIFICATES OF EACH SERIES WILL NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, ANY MASTER SERVICER, ANY
SPECIAL SERVICER, THE TRUSTEE, THE UNDERWRITER OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR ANY ASSETS IN THE RELATED TRUST
FUND WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY OR BY ANY OTHER PERSON, EXCEPT TO THE EXTENT PROVIDED
IN THE RELATED PROSPECTUS SUPPLEMENT. THE ASSETS IN EACH TRUST
FUND WILL BE HELD IN TRUST FOR THE BENEFIT OF THE HOLDERS OF
THE RELATED SERIES OF CERTIFICATES PURSUANT TO A POOLING AND
SERVICING AGREEMENT OR A TRUST AGREEMENT, AS MORE FULLY
DESCRIBED HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 17 HEREIN AND SUCH INFORMATION AS
MAY BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS
SUPPLEMENT BEFORE PURCHASING ANY OFFERED CERTIFICATE.
Prior to issuance there will have been no market for the
Certificates of any Series and there can be no assurance that a secondary
market for any Offered Certificates will develop or that, if it does develop,
it will continue. This Prospectus may not be used to consummate sales of the
Offered Certificates of any Series unless accompanied by the Prospectus
Supplement for such Series.
Offers of the Offered Certificates may be made through one or more
different methods, including offerings through underwriters as more fully
described under "Method of Distribution" herein and the related Prospectus
Supplement."
--------------
THE DATE OF THIS PROSPECTUS IS , 199
<PAGE>
VERSION 5: HEALTH CARE-RELATED FACILITIES
[The following to be inserted on PAGE ii of the PROSPECTUS SUPPLEMENT,
immediately following the second sentence of the first paragraph:]
Health care-related facilities will represent security for a material
concentration of the Mortgage Loans in any Trust Fund, based on principal
balance at the time such Trust Fund is formed.
<PAGE>
VERSION 5: HEALTH CARE-RELATED FACILITIES
[The following to be inserted in the TABLE OF CONTENTS of the PROSPECTUS,
immediately following "RISK FACTORS--RISKS ASSOCIATED WITH MORTGAGE LOANS AND
MORTGAGED PROPERTIES":]
Risks Particular to Health Care-Related Facilities.................. [page no.]
<PAGE>
VERSION 5: HEALTH CARE-RELATED FACILITIES
[The following to be inserted in the TABLE OF CONTENTS of the PROSPECTUS
SUPPLEMENT, immediately following "DESCRIPTION OF THE MORTGAGE POOL--GENERAL":]
Mortgage Loans Secured by Health Care-Related Properties.............[page no.]
<PAGE>
VERSION 5: HEALTH CARE-RELATED FACILITIES
[The following to be inserted in the PROSPECTUS under "RISK FACTORS,"
immediately FOLLOWING "RISKS ASSOCIATED WITH MORTGAGE LOANS AND MORTGAGED
PROPERTIES" and in the PROSPECTUS SUPPLEMENT under "RISK FACTORS," immediately
FOLLOWING "RISKS ASSOCIATED WITH CERTAIN OF THE MORTGAGE LOANS AND MORTGAGED
PROPERTIES":]
RISKS PARTICULAR TO HEALTH CARE-RELATED PROPERTIES
Certain types of health care-related facilities (including nursing
homes) typically receive a substantial portion of their revenues from
government reimbursement programs, primarily Medicaid and Medicare. Medicaid
and Medicare are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings, policy interpretations, delays by fiscal
intermediaries and government funding restrictions, all of which can adversely
affect revenues from operation. Moreover, governmental payors have employed
cost-containment measures that limit payments to health care providers and
there are currently under consideration various proposals for national health
care relief that could further limit these payments. In addition, providers of
long-term nursing care and other medical services are highly regulated by
federal, state and local law and are subject to, among other things, federal
and state licensing requirements, facility inspections, rate setting,
reimbursement policies, and laws relating to the adequacy of medical care,
distribution of pharmaceuticals, equipment, personnel operating policies and
maintenance of and additions to facilities and services, any or all of which
factors can increase the cost of operation, limit growth and in extreme cases,
require or result in suspension or cessation of operations.
Under applicable federal and state laws and regulations, Medicare
and Medicaid reimbursements are generally not permitted to be made to any
person other than the provider who actually furnished the related medical goods
and services. Accordingly, in the event of foreclosure on a Mortgaged Property
that is operated as a health care-related facility, none of the Trustee, the
Special Servicer or a subsequent lessee or operator of the Mortgaged Property
would generally be entitled to obtain from federal or state governments any
outstanding reimbursement payments relating to services furnished at the
respective Mortgaged Properties prior to such foreclosure. Furthermore, in the
event of foreclosure, there can be no assurance that the Trustee (or Special
Servicer) or purchaser in a foreclosure sale would be entitled to the rights
under any required licenses and regulatory approvals and such party may have to
apply in its own right for such licenses and approvals. There can be no
assurance that a new license could be obtained or that a new approval would be
granted. In addition, health care-related facilities are generally "special
purpose" properties that could not be readily converted to general residential,
retail or office use, and transfers of health care-related facilities are
subject to regulatory approvals under state, and in some cases federal, law not
required for transfers of other types of commercial operations and other types
of real estate, all of which may adversely affect the liquidation value.
<PAGE>
VERSION 5: HEALTH CARE-RELATED FACILITIES
[The following to be inserted in the PROSPECTUS under "DESCRIPTION OF THE TRUST
FUNDS," immediately following "MORTGAGE LOANS--GENERAL" and in the PROSPECTUS
SUPPLEMENT under "DESCRIPTION OF THE MORTGAGE POOL," immediately following
"GENERAL":]
MORTGAGE LOANS SECURED BY HEALTH CARE-RELATED PROPERTIES
The Mortgaged Properties may include Senior Housing, Assisted
Living Facilities, Skilled Nursing Facilities and Acute Care Facilities (any of
the foregoing, "Health Care-Related Facilities"). "Senior Housing" generally
consist of facilities with respect to which the residents are ambulatory,
handle their own affairs and typically are couples whose children have left the
home and at which the accommodations are usually apartment style. "Assisted
Living Facilities" are typically single or double room occupancy,
dormitory-style housing facilities which provide food service, cleaning and
some personal care and with respect to which the tenants are able to medicate
themselves but may require assistance with certain daily routines. "Skilled
Nursing Facilities" provide services to post trauma and frail residents with
limited mobility who require extensive medical treatment. "Acute Care
Facilities" generally consist of hospital and other facilities providing
short-term, acute medical care services.
Certain types of Health Care-Related Facilities, particularly Acute
Care Facilities, Skilled Nursing Facilities and some Assisted Living
Facilities, typically receive a substantial portion of their revenues from
government reimbursement programs, primarily Medicaid and Medicare. Medicaid
and Medicare are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings, policy interpretations, delays by fiscal
intermediaries and government funding restrictions. Moreover, governmental
payors have employed cost-containment measures that limit payments to health
care providers, and there exist various proposals for national health care
reform that could further limit those payments. Accordingly, there can be no
assurance that payments under government reimbursement programs will, in the
future, be sufficient to fully reimburse the cost of caring for program
beneficiaries. If such payments are insufficient, net operating income of those
Health Care-Related Facilities that receive revenues from those sources, and
consequently the ability of the related borrowers to meet their obligations
under any Mortgage Loans secured thereby, could be adversely affected.
Moreover, Health Care-Related Facilities are generally subject to
federal and state laws that relate to the adequacy of medical care,
distribution of pharmaceuticals, rate setting, equipment, personnel, operating
policies and additions to facilities and services. In addition, facilities
where such care or other medical services are provided are subject to periodic
inspection by governmental authorities to determine compliance with various
standards necessary to continued licensing under state law and continued
participation in the Medicaid and Medicare reimbursement programs. Providers of
assisted living services are also subject to state licensing requirements in
certain states. The failure of an operator to maintain or renew any required
license or regulatory approval could prevent it from continuing operations at a
Health Care-Related Facility or, if applicable, bar it from participation in
government reimbursement programs. Furthermore, under applicable federal and
state laws and regulations, Medicare and Medicaid reimbursements are generally
not permitted to be made to any person other than the provider who actually
furnished the related medical goods and services. Accordingly, in the event of
foreclosure, none of the Trustee, the Master Servicer, the Special Servicer or
a subsequent lessee or operator of any Health Care-Related Facility securing a
defaulted Mortgage Loan (a "Health Care-Related Mortgaged Property") would
generally be entitled to obtain from federal or state governments any
outstanding reimbursement payments relating to services furnished at such
property prior to such foreclosure. Any of the aforementioned events may
adversely affect the ability of the related borrowers to meet their Mortgage
Loan obligations.
<PAGE>
VERSION 5: HEALTH CARE-RELATED FACILITIES
Government regulation applying specifically to Acute Care
Facilities, Skilled Nursing Facilities and certain types of Assisted Living
Facilities includes health planning legislation, enacted by most states,
intended, at least in part, to regulate the supply of nursing beds. The most
common method of control is the requirement that a state authority first make a
determination of need, evidenced by its issuance of a Certificate of Need
("CON"), before a long-term care provider can establish a new facility, add
beds to an existing facility or, in some states, take certain other actions
(for example, acquire major medical equipment, make major capital expenditures,
add services, refinance long-term debt, or transfer ownership of a facility).
States also regulate nursing bed supply in other ways. For example, some states
have imposed moratoria on the licensing of new beds, or on the certification of
new Medicaid beds, or have discouraged the construction of new nursing
facilities by limiting Medicaid reimbursements allocable to the cost of new
construction and equipment. In general, a CON is site specific and operator
specific; it cannot be transferred from one site to another, or to another
operator, without the approval of the appropriate state agency. Accordingly, if
a Mortgage Loan secured by a lien on such a Health Care-Related Mortgaged
Property were foreclosed upon, the purchaser at foreclosure might be required
to obtain a new CON or an appropriate exemption. In addition, compliance by a
purchaser with applicable regulations may in any case require the engagement of
a new operator and the issuance of a new operating license. Upon a foreclosure,
a state regulatory agency may be willing to expedite any necessary review and
approval process to avoid interruption of care to a facility's residents, but
there can be no assurance that any will do so or that any necessary licenses or
approvals will be issued.
Further government regulation applicable to Health Care-Related
Facilities is found in the form of federal and state "fraud and abuse" laws
that generally prohibit payment or fee-splitting arrangements between health
care providers that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products or services. Violation of these restrictions can result in license
revocation, civil and criminal penalties, and exclusion from participation in
Medicare or Medicaid programs. The state law restrictions in this area vary
considerably from state to state. Moreover, the federal anti-kickback law
includes broad language that potentially could be applied to a wide range of
referral arrangements, and regulations designed to create "safe harbors" under
the law provide only limited guidance. Accordingly, there can be no assurance
that such laws will be interpreted in a manner consistent with the practices of
the owners or operators of the Health Care-Related Mortgaged Properties that
are subject to such laws.
The operators of Health Care-Related Facilities are likely to
compete on a local and regional basis with others that operate similar
facilities, some of which competitors may be better capitalized, may offer
services not offered by such operators, or may be owned by non-profit
organizations or government agencies supported by endowments, charitable
contributions, tax revenues and other sources not available to such operators.
The successful operation of a Health Care-Related Facility will generally
depend upon the number of competing facilities in the local market, as well as
upon other factors such as its age, appearance, reputation and management, the
types of services it provides and, where applicable, the quality of care and
the cost of that care. The inability of a Health Care-Related Mortgaged
Property to flourish in a competitive market may increase the likelihood of
foreclosure on the related Mortgage Loan, possibly affecting the yield on one
or more classes of the related series of Offered Certificates.
<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. The securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement become
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 any such State.
VERSION 6: INDUSTRIAL PROPERTIES
PROSPECTUS
HELLER FINANCIAL COMMERCIAL MORTGAGE ASSET CORP.,
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
The mortgage pass-through certificates (the "Offered Certificates")
offered hereby and by supplements hereto (each, a "Prospectus Supplement") will
be offered from time to time in one or more series (each, a "Series"). The
Offered Certificates of any Series, together with any other mortgage
pass-through certificates of such Series, are collectively referred to herein
as the "Certificates". Each Series of Certificates will represent in the
aggregate the entire beneficial ownership interest in a trust fund (with
respect to any Series, the "Trust Fund") consisting of one or more segregated
pools of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage participations, mortgage pass-through certificates
or other mortgage-backed securities evidencing interests in or secured by
multifamily or commercial mortgage loans (collectively, the "CMBS") or a
combination of Mortgage Loans and/or CMBS (with respect to any Series,
collectively, the "Mortgage Assets"). Industrial properties will represent
security for a material concentration of the Mortgage Loans (or the mortgage
loans underlying the CMBS) in any Trust Fund, based on principal balance at the
time such Trust Fund is formed. If so specified in the related Prospectus
Supplement, some or all of the Mortgage Loans will include assignments of the
leases of the related Mortgaged Properties (as defined herein) and/or
assignments of the rental payments due from the lessees under such leases (each
type of assignment, a "Lease Assignment"). A significant or the sole source of
payments on certain Commercial Loans (as defined herein) and, therefore, of
distributions on certain Series of Certificates, will be such rental payments.
If so specified in the related Prospectus Supplement, the Trust Fund for a
Series of Certificates may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support, or any combination
thereof (with respect to any Series, collectively, "Credit Support"), and
currency or interest rate exchange agreements and other financial assets, or
any combination thereof (with respect to any Series, collectively, "Cash Flow
Agreements"). See "Description of the Trust Funds," "Description of the
Certificates" and "Description of Credit Support."
Retain this Prospectus for future reference. This Prospectus may
not be used to consummate sales of the Offered Certificates of any Series
unless accompanied by the Prospectus Supplement for such Series.
(cover continued on next page)
--------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE CERTIFICATES OF EACH SERIES WILL NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, ANY MASTER SERVICER, ANY
SPECIAL SERVICER, THE TRUSTEE, THE UNDERWRITER OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR ANY ASSETS IN THE RELATED TRUST
FUND WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY OR BY ANY OTHER PERSON, EXCEPT TO THE EXTENT PROVIDED
IN THE RELATED PROSPECTUS SUPPLEMENT. THE ASSETS IN EACH TRUST
FUND WILL BE HELD IN TRUST FOR THE BENEFIT OF THE HOLDERS OF
THE RELATED SERIES OF CERTIFICATES PURSUANT TO A POOLING AND
SERVICING AGREEMENT OR A TRUST AGREEMENT, AS MORE FULLY
DESCRIBED HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 17 HEREIN AND SUCH INFORMATION AS
MAY BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS
SUPPLEMENT BEFORE PURCHASING ANY OFFERED CERTIFICATE.
Prior to issuance there will have been no market for the
Certificates of any Series and there can be no assurance that a secondary
market for any Offered Certificates will develop or that, if it does develop,
it will continue. This Prospectus may not be used to consummate sales of the
Offered Certificates of any Series unless accompanied by the Prospectus
Supplement for such Series.
Offers of the Offered Certificates may be made through one or more
different methods, including offerings through underwriters as more fully
described under "Method of Distribution" herein and the related Prospectus
Supplement."
--------------
THE DATE OF THIS PROSPECTUS IS , 199
<PAGE>
VERSION 6: INDUSTRIAL PROPERTIES
[The following to be inserted on PAGE ii of the PROSPECTUS SUPPLEMENT,
immediately following the second sentence of the first paragraph:]
Industrial properties will represent security for a material concentration of
the Mortgage Loans in any Trust Fund, based on principal balance at the time
such Trust Fund is formed.
<PAGE>
VERSION 6: INDUSTRIAL PROPERTIES
[The following to be inserted in the TABLE OF CONTENTS of the PROSPECTUS,
immediately Following "RISK FACTORS--RISKS ASSOCIATED WITH MORTGAGE LOANS AND
MORTGAGED PROPERTIES":]
Risks Particular to Industrial Properties........................... [page no.]
<PAGE>
VERSION 6: INDUSTRIAL PROPERTIES
[The following to be inserted in the TABLE OF CONTENTS of the PROSPECTUS
SUPPLEMENT, immediately following "DESCRIPTION OF THE MORTGAGE POOL--GENERAL":]
Mortgage Loans Secured by Industrial Properties......................[page no.]
<PAGE>
VERSION 6: INDUSTRIAL PROPERTIES
[The following to be inserted in the PROSPECTUS under "RISK FACTORS,"
immediately Following "RISKS ASSOCIATED WITH MORTGAGE LOANS AND MORTGAGED
PROPERTIES" and in the PROSPECTUS SUPPLEMENT under "RISK FACTORS," immediately
following "RISKS ASSOCIATED WITH CERTAIN OF THE MORTGAGE LOANS AND MORTGAGED
PROPERTIES":]
RISKS PARTICULAR TO INDUSTRIAL PROPERTIES
Industrial properties may be adversely affected by reduced demand
for industrial space occasioned by a decline in a particular industry segment,
and an industrial property that suited the particular needs of its original
tenant may be difficult to relet to another tenant or may become functionally
obsolete relative to newer properties. Furthermore, industrial properties may
be adversely affected by the availability of labor sources or a change in the
proximity of supply sources.
<PAGE>
VERSION 6: INDUSTRIAL PROPERTIES
[The following to be inserted in the PROSPECTUS under "DESCRIPTION OF THE TRUST
FUNDS," immediately following "MORTGAGE LOANS--GENERAL" and in the PROSPECTUS
SUPPLEMENT under "DESCRIPTION OF THE MORTGAGE POOL," immediately following
"GENERAL":]
MORTGAGE LOANS SECURED BY INDUSTRIAL PROPERTIES
Significant factors determining the value of industrial properties
are the quality of tenants, building design and adaptability, the functionality
of the finish-out and the location of the property. Concerns about the quality
of tenants, particularly major tenants, are similar in both office properties
and industrial properties, although industrial properties are more frequently
dependent on a single tenant.
Aspects of building site, design and adaptability affect the value
of an industrial property. Site characteristics which are valuable to an
industrial property include clear heights, column spacing, number of bays and
bay depths, divisibility, floor loading capacities, truck turning radius and
overall functionality and accessibility. Nevertheless, site characteristics of
an industrial property suitable for one tenant may not be appropriate for other
potential tenants, which may make it difficult to relet the property.
Location is also important because an industrial property requires
the availability of labor sources, proximity to supply sources and customers
and accessibility to rail lines, major roadways and other distribution
channels. Further, industrial properties may be adversely affected by economic
declines in the industry segment of their tenants.
<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. The securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement become
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 any such State.
VERSION 7: SELF-STORAGE FACILITIES
PROSPECTUS
HELLER FINANCIAL COMMERCIAL MORTGAGE ASSET CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
The mortgage pass-through certificates (the "Offered Certificates")
offered hereby and by supplements hereto (each, a "Prospectus Supplement") will
be offered from time to time in one or more series (each, a "Series"). The
Offered Certificates of any Series, together with any other mortgage
pass-through certificates of such Series, are collectively referred to herein
as the "Certificates". Each Series of Certificates will represent in the
aggregate the entire beneficial ownership interest in a trust fund (with
respect to any Series, the "Trust Fund") consisting of one or more segregated
pools of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage participations, mortgage pass-through certificates
or other mortgage-backed securities evidencing interests in or secured by
multifamily or commercial mortgage loans (collectively, the "CMBS") or a
combination of Mortgage Loans and/or CMBS (with respect to any Series,
collectively, the "Mortgage Assets"). Self-storage facilities will represent
security for a material concentration of the Mortgage Loans (or the mortgage
loans underlying the CMBS) in any Trust Fund, based on principal balance at the
time such Trust Fund is formed. If so specified in the related Prospectus
Supplement, some or all of the Mortgage Loans will include assignments of the
leases of the related Mortgaged Properties (as defined herein) and/or
assignments of the rental payments due from the lessees under such leases (each
type of assignment, a "Lease Assignment"). A significant or the sole source of
payments on certain Commercial Loans (as defined herein) and, therefore, of
distributions on certain Series of Certificates, will be such rental payments.
If so specified in the related Prospectus Supplement, the Trust Fund for a
Series of Certificates may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support, or any combination
thereof (with respect to any Series, collectively, "Credit Support"), and
currency or interest rate exchange agreements and other financial assets, or
any combination thereof (with respect to any Series, collectively, "Cash Flow
Agreements"). See "Description of the Trust Funds," "Description of the
Certificates" and "Description of Credit Support."
Retain this Prospectus for future reference. This Prospectus may
not be used to consummate sales of the Offered Certificates of any Series
unless accompanied by the Prospectus Supplement for such Series.
(cover continued on next page)
--------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE CERTIFICATES OF EACH SERIES WILL NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, ANY MASTER SERVICER, ANY
SPECIAL SERVICER, THE TRUSTEE, THE UNDERWRITER OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR ANY ASSETS IN THE RELATED TRUST
FUND WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY OR BY ANY OTHER PERSON, EXCEPT TO THE EXTENT PROVIDED
IN THE RELATED PROSPECTUS SUPPLEMENT. THE ASSETS IN EACH TRUST
FUND WILL BE HELD IN TRUST FOR THE BENEFIT OF THE HOLDERS OF
THE RELATED SERIES OF CERTIFICATES PURSUANT TO A POOLING AND
SERVICING AGREEMENT OR A TRUST AGREEMENT, AS MORE FULLY
DESCRIBED HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 17 HEREIN AND SUCH INFORMATION AS
MAY BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS
SUPPLEMENT BEFORE PURCHASING ANY OFFERED CERTIFICATE.
Prior to issuance there will have been no market for the
Certificates of any Series and there can be no assurance that a secondary
market for any Offered Certificates will develop or that, if it does develop,
it will continue. This Prospectus may not be used to consummate sales of the
Offered Certificates of any Series unless accompanied by the Prospectus
Supplement for such Series.
Offers of the Offered Certificates may be made through one or more
different methods, including offerings through underwriters as more fully
described under "Method of Distribution" herein and the related Prospectus
Supplement."
--------------
THE DATE OF THIS PROSPECTUS IS , 199
<PAGE>
VERSION 7: SELF-STORAGE FACILITIES
[The following to be inserted on PAGE ii of the PROSPECTUS SUPPLEMENT,
immediately following the second sentence of the first paragraph:]
Self-storage facilities will represent security for a material concentration of
the Mortgage Loans in any Trust Fund, based on principal balance at the time
such Trust Fund is formed.
<PAGE>
VERSION 7: SELF-STORAGE FACILITIES
[The following to be inserted in the TABLE OF CONTENTS of the PROSPECTUS,
immediately following "RISK FACTORS--RISKS ASSOCIATED WITH MORTGAGE LOANS AND
MORTGAGED PROPERTIES":]
Risks Particular to Self-Storage Facilities..........................[page no.]
<PAGE>
VERSION 7: SELF-STORAGE FACILITIES
[The following to be inserted in the TABLE OF CONTENTS of the PROSPECTUS
SUPPLEMENT, immediately following "DESCRIPTION OF THE MORTGAGE POOL--GENERAL":]
Mortgage Loans Secured by Self-Storage Facilities....................[page no.]
<PAGE>
VERSION 7: SELF-STORAGE FACILITIES
[The following to be inserted in the PROSPECTUS under "RISK FACTORS,"
immediately following "RISKS ASSOCIATED WITH MORTGAGE LOANS AND MORTGAGED
PROPERTIES" and in the PROSPECTUS SUPPLEMENT under "RISK FACTORS," immediately
following "RISKS ASSOCIATED WITH CERTAIN OF THE MORTGAGE LOANS AND MORTGAGED
PROPERTIES":]
RISKS PARTICULAR TO SELF-STORAGE FACILITIES
Self-storage properties are considered vulnerable to competition
because both acquisition costs and break-even occupancy are relatively low. The
conversion of self-storage facilities to alternative uses would generally
require substantial capital expenditures. Thus, if the operation of any of the
self-storage Mortgaged Properties becomes unprofitable due to decreased demand,
competition, age of improvements or other factors such that the borrower
becomes unable to meet its obligation on the related Mortgage Loan, the
liquidation value of that self-storage Mortgaged Property may be substantially
less, relative to the amount owing on the Mortgage Loan, than would be the case
if the self-storage Mortgaged Property were readily adaptable to other uses.
Tenant privacy, anonymity and efficient access may heighten environmental
risks. The environmental assessments discussed herein did not include an
inspection of the contents of the self-storage units included in the
self-storage Mortgaged Properties and there is no assurance that all of the
units included in the self-storage Mortgaged Properties are free from hazardous
substances or other pollutants or contaminants or will remain so in the future;
however, substantially all of the lease agreements used in connection with such
Mortgaged Properties prohibit the storage of hazardous substances, pollutants
or contaminants.
<PAGE>
VERSION 7: SELF-STORAGE FACILITIES
[The following to be inserted in the PROSPECTUS under "DESCRIPTION OF THE TRUST
FUNDS," immediately following "MORTGAGE LOANS--GENERAL" and in the PROSPECTUS
SUPPLEMENT under "DESCRIPTION OF THE MORTGAGE POOL," immediately following
"GENERAL":]
MORTGAGE LOANS SECURED BY SELF-STORAGE FACILITIES
Because of relatively low acquisition costs and break-even
occupancy rates, self-storage facilities are considered vulnerable to
competition. Despite their low acquisition costs, and because of their
particular building characteristics, self-storage facilities would require
substantial capital investments in order to adapt them to alternative uses.
Such constraint in adaptability to other uses may substantially reduce the
liquidation value of a self-storage mortgaged property. In addition to
competition, other factors that affect the success of a self-storage facility,
and thus the ability of the borrower to meet its obligations on the related
mortgage loan, include the location and visibility of the facility, its
proximity to apartment complexes or commercial users, trends of apartment
tenants in the area moving to single-family homes, services provided (such as
security and accessibility), age of improvements, the appearance of the
improvements and the quality of management.
<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. The securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement become
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 any such State.
VERSION 8: MANUFACTURED HOUSING COMMUNITIES
PROSPECTUS
HELLER FINANCIAL COMMERCIAL MORTGAGE ASSET CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
The mortgage pass-through certificates (the "Offered Certificates")
offered hereby and by supplements hereto (each, a "Prospectus Supplement") will
be offered from time to time in one or more series (each, a "Series"). The
Offered Certificates of any Series, together with any other mortgage
pass-through certificates of such Series, are collectively referred to herein
as the "Certificates". Each Series of Certificates will represent in the
aggregate the entire beneficial ownership interest in a trust fund (with
respect to any Series, the "Trust Fund") consisting of one or more segregated
pools of various types of multifamily or commercial mortgage loans (the
"Mortgage Loans"), mortgage participations, mortgage pass-through certificates
or other mortgage-backed securities evidencing interests in or secured by
multifamily or commercial mortgage loans (collectively, the "CMBS") or a
combination of Mortgage Loans and/or CMBS (with respect to any Series,
collectively, the "Mortgage Assets"). Manufactured housing communities will
represent security for a material concentration of the Mortgage Loans (or the
mortgage loans underlying the CMBS) in any Trust Fund, based on principal
balance at the time such Trust Fund is formed. If so specified in the related
Prospectus Supplement, some or all of the Mortgage Loans will include
assignments of the leases of the related Mortgaged Properties (as defined
herein) and/or assignments of the rental payments due from the lessees under
such leases (each type of assignment, a "Lease Assignment"). A significant or
the sole source of payments on certain Commercial Loans (as defined herein)
and, therefore, of distributions on certain Series of Certificates, will be
such rental payments. If so specified in the related Prospectus Supplement, the
Trust Fund for a Series of Certificates may include letters of credit,
insurance policies, guarantees, reserve funds or other types of credit support,
or any combination thereof (with respect to any Series, collectively, "Credit
Support"), and currency or interest rate exchange agreements and other
financial assets, or any combination thereof (with respect to any Series,
collectively, "Cash Flow Agreements"). See "Description of the Trust Funds,"
"Description of the Certificates" and "Description of Credit Support."
Retain this Prospectus for future reference. This Prospectus may
not be used to consummate sales of the Offered Certificates of any Series
unless accompanied by the Prospectus Supplement for such Series.
(cover continued on next page)
--------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE CERTIFICATES OF EACH SERIES WILL NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, ANY MASTER SERVICER, ANY
SPECIAL SERVICER, THE TRUSTEE, THE UNDERWRITER OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR ANY ASSETS IN THE RELATED TRUST
FUND WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY OR BY ANY OTHER PERSON, EXCEPT TO THE EXTENT PROVIDED
IN THE RELATED PROSPECTUS SUPPLEMENT. THE ASSETS IN EACH TRUST
FUND WILL BE HELD IN TRUST FOR THE BENEFIT OF THE HOLDERS OF THE
RELATED SERIES OF CERTIFICATES PURSUANT TO A POOLING AND SERVICING
AGREEMENT OR A TRUST AGREEMENT, AS MORE FULLY DESCRIBED HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 17 HEREIN AND SUCH INFORMATION AS
MAY BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS
SUPPLEMENT BEFORE PURCHASING ANY OFFERED CERTIFICATE.
Prior to issuance there will have been no market for the
Certificates of any Series and there can be no assurance that a secondary
market for any Offered Certificates will develop or that, if it does develop,
it will continue. This Prospectus may not be used to consummate sales of the
Offered Certificates of any Series unless accompanied by the Prospectus
Supplement for such Series.
Offers of the Offered Certificates may be made through one or more
different methods, including offerings through underwriters as more fully
described under "Method of Distribution" herein and the related Prospectus
Supplement."
--------------
THE DATE OF THIS PROSPECTUS IS , 199
<PAGE>
VERSION 8: MANUFACTURED HOUSING COMMUNITIES
[The following to be inserted on PAGE ii of the PROSPECTUS SUPPLEMENT,
immediately following the second sentence of the first paragraph:]
Manufactured housing communities will represent security for a material
concentration of the Mortgage Loans in any Trust Fund, based on principal
balance at the time such Trust Fund is formed.
<PAGE>
VERSION 8: MANUFACTURED HOUSING COMMUNITIES
[The following to be inserted in the TABLE OF CONTENTS of the PROSPECTUS,
immediately following "RISK FACTORS--RISKS ASSOCIATED WITH MORTGAGE LOANS AND
MORTGAGED PROPERTIES":]
Risks Particular to Manufactured Housing Communities................ [page no.]
<PAGE>
VERSION 8: MANUFACTURED HOUSING COMMUNITIES
[The following to be inserted in the TABLE OF CONTENTS of the
PROSPECTUS SUPPLEMENT, immediately following "DESCRIPTION OF THE MORTGAGE
POOL--GENERAL":]
Mortgage Loans Secured by Manufactured Housing Communities...........[page no.]
<PAGE>
VERSION 8: MANUFACTURED HOUSING COMMUNITIES
[The following to be inserted in the PROSPECTUS under "RISK FACTORS,"
immediately following "RISKS ASSOCIATED WITH MORTGAGE LOANS AND MORTGAGED
PROPERTIES" and in the PROSPECTUS SUPPLEMENT under "RISK FACTORS," immediately
following "RISKS ASSOCIATED WITH CERTAIN OF THE MORTGAGE LOANS AND MORTGAGED
PROPERTIES":]
RISKS PARTICULAR TO MANUFACTURED HOUSING COMMUNITIES
The successful operation of a Mortgaged Property operated as a
manufactured housing community will generally depend upon the number of
competing manufactured housing communities and other residential developments
in the local market, as well as upon other factors such as its age, appearance,
reputation, management and the types of services it provides.
Manufactured housing communities are "special purpose" properties
that may not be readily converted to general residential, retail or office use.
Thus, if the operation of any of the Mortgaged Properties constituting
manufactured housing communities becomes unprofitable due to competition, age
of the improvements or other factors such that the borrower becomes unable to
meet its obligations on the related Mortgage Loan, the liquidation value of
that Mortgaged Property may be substantially less, relative to the amount owing
on the Mortgage Loan, than would be the case if the Mortgaged Property were
readily adaptable to other uses.
<PAGE>
VERSION 8: MANUFACTURED HOUSING COMMUNITIES
[The following to be inserted in the PROSPECTUS under "DESCRIPTION OF THE TRUST
FUNDS," immediately following "MORTGAGE LOANS--GENERAL" and in the PROSPECTUS
SUPPLEMENT under "DESCRIPTION OF THE MORTGAGE POOL," immediately following
"GENERAL":]
MORTGAGE LOANS SECURED BY MANUFACTURED HOUSING COMMUNITIES
For purposes of this discussion, manufactured housing communities
may include manufactured housing communities, recreational vehicle parks or
combinations thereof. Loans secured by liens on properties of these types are
affected by factors not associated with loans secured by liens on other types
of income-producing real estate. The successful operation of a manufactured
housing community will generally depend upon the number of competing
manufactured housing communities and other residential developments in the
local market (such as apartment buildings, other manufactured housing
communities and site-built single family homes), as well as upon other factors
such as its age, appearance, reputation, the ability of management to provide
adequate maintenance and insurance, and the types of services it provides.
Manufactured housing communities are "special purpose" properties that may not
be readily converted to general residential, retail or office use. Thus, if the
operation of a manufactured housing community becomes unprofitable due to
competition, age of the improvements or other factors such that the borrower
becomes unable to meet its obligations on the related mortgage loan, the
liquidation value of that manufactured housing community may be substantially
less, relative to the amount owing on the mortgage loan, than would be the case
if the manufactured housing community were readily adaptable to other uses.
Certain states regulate the relationship of a manufactured housing
community owner and its tenants. Commonly, these laws require a written lease,
good cause for eviction, disclosure of fees, and notification to residents of
changed land use, while prohibiting unreasonable rules, retaliatory evictions,
and restrictions on a resident's choice of unit vendors. Manufactured housing
community owners have been the subject of suits under state "Unfair and
Deceptive Practices Acts" and other general consumer protection statutes for
coercive, abusive or unconscionable leasing and sales practices. A few states
offer more significant protection. For example, there are provisions that limit
the basis on which a landlord may terminate a manufactured housing unit owner's
tenancy or increase its rent or prohibit a landlord from terminating a tenancy
solely by reason of the sale of the owner's manufactured housing unit. Certain
states also regulate changes in manufactured housing community use and require
that the landlord give written notice to its tenants a substantial period of
time prior to the projected change.
In addition to state regulation of the landlord-tenant
relationship, numerous counties and municipalities impose rent control on
manufactured housing communities. These ordinances may limit rent increases to
fixed percentages, to percentages of increases in the consumer price index, to
increases set or approved by a governmental agency, or to increases determined
through mediation or binding arbitration. In many cases, the rent control laws
do not permit vacancy decontrol, or permit vacancy decontrol only in the
relatively rare event that the manufactured housing unit is removed from the
homesite. Local authority to impose rent control on manufactured housing
communities is pre-empted by state law in certain states, and rent control is
not imposed at the state level in those states. In some states, however, local
rent control ordinances are not pre-empted for tenants having short-term or
month-to-month leases, and properties there may be subject to various forms of
rent control with respect to those tenants. Any limitations on a borrower's
ability to raise property rents may impair such borrower's ability to repay its
mortgage loan from its net operating income or the proceeds of a sale or
refinancing of the related mortgaged property.
<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. The securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement become
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 any such State.
SUBJECT TO COMPLETION, DATED JUNE 24, 1998
PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED JUNE 24, 1998)
$
(APPROXIMATELY)
HELLER FINANCIAL COMMERCIAL MORTGAGE ASSET CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 199 -
The Series 199 - Mortgage Pass-Through Certificates (the
"Certificates") will include the following classes of Certificates, designated
as the Class A1, Class A1X, Class A2, Class A2X, Class B, Class C, Class BCX,
Class D and Class E Certificates (the "Offered Certificates"). In addition to
the Offered Certificates, the Certificates will also include the Class F, Class
G, Class NR, Class R-I, Class R-II and Class R-III Certificates. Only the
Offered Certificates are offered hereby.
(cover continued on next page)
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON THE RATE AND
TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS AND LIQUIDATIONS)
ON THE MORTGAGE LOANS. THE YIELD TO MATURITY ON EACH CLASS OF OFFERED
CERTIFICATES WILL BE SENSITIVE TO LOSSES DUE TO DEFAULTS ON THE MORTGAGE
LOANS (AND THE TIMING THEREOF), TO THE EXTENT THAT SUCH LOSSES ARE NOT COVERED
BY ANY CLASS OF CERTIFICATES HAVING A LOWER PAYMENT PRIORITY, AS DESCRIBED
HEREIN. THE YIELD TO INVESTORS ON THE INTEREST ONLY CERTIFICATES WILL BE
SENSITIVE TO THE RATE AND TIMING OF PREPAYMENTS, DEFAULTS AND
LIQUIDATIONSON THE MORTGAGE LOANS. THE RATES OF PREPAYMENT,
DEFAULTS AND LIQUIDATIONS ON THE RAPID RATE OF PREPAYMENT,
DEFAULTS AND LIQUIDATIONS ON THE MORTGAGE LOANS COULD
RESULT IN THE FAILURE OF INVESTORS IN THE INTEREST
ONLY CERTIFICATES TO RECOVER THEIR INITIAL INVESTMENTS.
SEE "SUMMARY -- SPECIAL PRINCIPAL PAYMENT CONSIDERATIONS"
AND "-- SPECIAL YIELD CONSIDERATIONS", AND "CERTAIN
PREPAYMENT, MATURITY AND YIELD CONSIDERATIONS"
HEREIN AND "YIELD CONSIDERATIONS" IN THE PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER THE CAPTION
"RISK FACTORS" BEGINNING ON PAGES __ HEREIN AND PAGE 17 IN THE PROSPECTUS
BEFORE PURCHASING ANY OFFERED CERTIFICATES.
----------
INITIAL CLASS PASS-THROUGH RATE(2)
BALANCE(1) ---------------------
----------
Class A1............ $ %
Class A1X........... $ Weighted Average Pass-Through Rate(3)
Class A2............ $ %
Class A2X........... $ Weighted Average Pass-Through Rate(3)
Class B............. $ Weighted Average Pass-Through Rate
Class C............. $ Weighted Average Pass-Through Rate
Class BCX........... $ (3)(4)
Class D............. $ Weighted Average Pass-Through Rate
Class E............. $ Weighted Average Pass-Through Rate
---------------------------
(1) Subject to a permitted variance of plus or minus ___%.
(2) In addition to distributions of interest and/or principal, holders of the
Certificates will be entitled to receive a portion of any Prepayment
Premiums as described herein.
(3) Based on the related Notional Amount as described herein. See "Description
of the Certificates--Distributions of Interest on the Certificates" in the
Prospectus.
(4) Calculated based on the Pass-Through Rates of two components. The
Pass-Through Rate on the Class BCX component B (as defined herein) is %
and on the Class BCX component C (as defined herein) is %.
The Offered Certificates will be purchased from the Depositor by
(the "Underwriter") and will be offered by the Underwriter from time
to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor from the sale of the
Offered Certificates, before deducting expenses payable by the Depositor
estimated to be approximately $ , will be % of the initial aggregate
principal balance of the Offered Certificates as of , 199 (the "Cut-Off
Date"), plus accrued interest from the Cut-off Date. The Offered Certificates
are offered by the Underwriter subject to prior sale, when, as and if delivered
to and accepted by the Underwriter and subject to certain other conditions. It
is expected that the Offered Certificates will be delivered in book-entry form
through the Same-Day Funds Settlement System of DTC on or about , 199 (the
"Delivery Date"), against payment therefor in immediately available funds.
<PAGE>
[UNDERWRITER]
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS , 199
<PAGE>
(continued from previous page)
The Certificates will represent in the aggregate the entire
beneficial interest in a trust fund (the "Trust Fund") to be established by
Heller Financial Commercial Mortgage Asset Corp., (the "Depositor"). The Trust
Fund will consist primarily of a pool (the "Mortgage Pool") of fixed rate
mortgage loans with original terms to maturity of not more than 300 months
(such mortgage loans are referred to collectively herein as the "Mortgage
Loans"), secured by first liens on fee simple or leasehold interests in
multifamily, retail, hotel, office, industrial, and other commercial
properties. The Mortgage Loans were originated by several institutions
identified herein (collectively, the "Originators"), acquired by an affiliate
of the Depositor and will be sold to the Depositor on or prior to the date of
initial issuance of the Certificates.
Distributions on the Certificates will be made, to the extent of
available funds, on the day of each month or, if any such day is not a business
day, on the next succeeding business day, beginning in 199 (each, a
"Distribution Date"). As more fully described herein, distributions allocable
to interest, if any, on the Offered Certificates on each Distribution Date will
be based on the then applicable pass-through rate (the "Pass-Through Rate") and
the aggregate principal balance (the "Class Balance") (or the related notional
balance (the "Notional Amount") in the case of the Class A1X and Class A2X
Certificates and each component of the Class BCX Certificates (each such class,
the "Interest Only Certificates")) of such class or component outstanding
immediately prior to such Distribution Date. The Pass-Through Rates applicable
to the Class A1 and Class A2 Certificates and for each component of the Class
BCX Certificates will be as set forth above. The Pass-Through Rates for the
Class A1X, Class A2X, Class B, Class C, Class D and Class E Certificates will
be variable and will be calculated as set forth herein. Distributions in
respect of principal, if any, of the Certificates will be made as described
herein under "Description of the Certificates -- Distributions" and "--Priority
of Distributions".
The Class A1, Class A2, Class A1X and Class A2X Certificates will
evidence approximately an initial % undivided interest in the Trust Fund. The
Class B and Class BCX component B (as defined herein) will evidence
approximately an initial % undivided interest in the Trust Fund. The Class C
and Class BCX component C (as defined herein) will evidence approximately an
initial % undivided interest in the Trust Fund. The Class D Certificates will
evidence approximately an initial % undivided interest in the Trust Fund. The
Class E Certificates will evidence approximately an initial % undivided
interest in the Trust Fund.
It is a condition of the issuance of the Class A1 and Class A2
Certificates that they be rated " " by (" ") and (" "). It is a
condition of the issuance of the Class A1X and Class A2X Certificates that they
be rated " " by and " " by . It is a condition of the issuance of the
Class B Certificates that they be rated not lower than " " by and . It
is a condition of the issuance of the Class C Certificates that they be rated
not lower than " " by and " " by . It is a
condition of the issuance of the Class BCX Certificates that they be rated not
lower than " " by . It is a condition of the issuance of the
Class D Certificates that they be rated not lower than " " by
and . It is a condition of the issuance of the Class E
Certificates that they be rated not lower than " " by and
. The ratings by on the Interest Only
Certificates do not address any prepayment or loss scenarios with respect to
the Mortgage Loans or the likelihood of receipt of Prepayment Premiums. See
"Rating" herein.
will act as master servicer (in such capacity,
the "Master Servicer") and as special servicer (in such capacity, the "Special
Servicer") of the Mortgage Loans. The obligations of the Master Servicer and
the Special Servicer with respect to the Certificates will be limited to their
contractual servicing obligations and the obligation under certain
circumstances to make P&I Advances (as defined herein) to the
Certificateholders. See "Servicing." It is possible that the Special Servicer
or one or more of its affiliates may purchase a portion of the Class NR
Certificates.
(continued on following page)
ii
<PAGE>
(continued from previous page)
As described herein, three separate "real estate mortgage
investment conduit" ("REMIC") elections will be made in connection with the
Trust Fund for federal income tax purposes. The Certificates, other than the
Class R-I, Class R- II and Class R-III Certificates, will constitute "regular
interests" in the related REMIC and the Class R-I, Class R-II and Class R-III
Certificates will constitute the sole class of "residual interest" in the
related REMIC. See "Federal Income Tax Consequences" herein and in the
Prospectus.
The Offered Certificates initially will be represented by
certificates registered in the name of Cede & Co., as nominee of The Depository
Trust Company ("DTC"), as further described herein. The interests of beneficial
owners of the Offered Certificates will be represented by book entries on the
records of participating members of DTC. Definitive certificates will be
available for the Offered Certificates only under the limited circumstances
described herein. See "Description of the Certificates -- Book-Entry
Registration of the Offered Certificates" herein.
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF
PAYMENTS ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT
AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER, THE SPECIAL
SERVICER, THE TRUSTEE, THE UNDERWRITER OR ANY OF THEIR AFFILIATES. NEITHER THE
OFFERED CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR,
THE MASTER SERVICER, THE SPECIAL SERVICER, THE TRUSTEE, THE UNDERWRITER OR ANY
OF THEIR AFFILIATES.
See "Index of Principal Definitions" in the Prospectus for the
location of meanings of capitalized terms used but not defined herein. See
"Index of Principal Definitions" herein for location of meanings of other
capitalized terms used herein.
There is currently no secondary market for the Offered
Certificates. The Underwriter currently expects to make a secondary market in
the Offered Certificates, but has no obligation to do so. There can be no
assurance that such a market will develop or, if it does develop, that it will
continue. See "Method of Distribution" herein.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION
ABOUT THE OFFERING OF THE OFFERED CERTIFICATES. ADDITIONAL INFORMATION IS
CONTAINED IN THE PROSPECTUS, DATED , 199 AND ATTACHED HERETO. PURCHASERS
ARE URGED TO READ BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL.
SALES OF THE CERTIFICATES OFFERED HEREBY MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR
ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
--------------
THE OFFERED CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT
CONSTITUTE PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR
AND ARE BEING OFFERED PURSUANT TO ITS PROSPECTUS DATED , 199 , OF WHICH THIS
PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS
SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS
OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO
READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE
OFFERED CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED
BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL , 199 , ALL DEALERS EFFECTING TRANSACTIONS IN
THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND A PROSPECTUS. THIS IS IN
ADDITION TO THE
iii
<PAGE>
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
--------------
FORWARD-LOOKING STATEMENTS
IF AND WHEN INCLUDED IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS OR IN DOCUMENTS INCORPORATED HEREIN OR THEREIN BY
REFERENCE, THE WORDS "EXPECTS," "INTENDS," "ANTICIPATES," "ESTIMATES" AND
ANALOGOUS EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. ANY
SUCH STATEMENTS, WHICH MAY INCLUDE STATEMENTS CONTAINED IN "RISK FACTORS,"
INHERENTLY ARE SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. SUCH RISKS AND
UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL ECONOMIC AND BUSINESS CONDITIONS,
COMPETITION, CHANGES IN FOREIGN POLITICAL, SOCIAL AND ECONOMIC CONDITIONS,
REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, CUSTOMER
PREFERENCES AND VARIOUS OTHER EVENTS, CONDITIONS AND CIRCUMSTANCES, MANY OF
WHICH ARE BEYOND THE DEPOSITOR'S CONTROL. THESE FORWARD-LOOKING STATEMENTS
SPEAK ONLY AS OF THE DATE OF THIS PROSPECTUS SUPPLEMENT. THE DEPOSITOR
EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY
UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENT CONTAINED HEREIN TO
REFLECT ANY CHANGE IN THE DEPOSITOR'S EXPECTATIONS WITH REGARD THERETO OR ANY
CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS
BASED.
--------------
iv
<PAGE>
TABLE OF CONTENTS
SUMMARY OF PROSPECTUS SUPPLEMENT S-1
RISK FACTORS S-12
DESCRIPTION OF THE MORTGAGE POOL S-17
General S-17
Representations and Warranties S-18
Certain Characteristics Of The Mortgage Loans S-19
Related Borrowers and Other Issues S-28
Escrows S-28
Underwriting Guidelines S-28
Additional Information S-28
DESCRIPTION OF THE CERTIFICATES S-28
General S-28
Book-Entry Registration of the Offered Certificates S-29
Distributions S-30
Priority of Distributions S-33
Other Certificates S-33
Subordination S-33
ADVANCES S-35
CERTAIN PREPAYMENT, MATURITY AND YIELD CONSIDERATIONS S-35
Weighted Average Life of the Offered Certificates S-36
Interest Only Certificates Yield Considerations S-38
Class C, Class BCX, Class D and Class E Yield Considerations S-39
SERVICING S-40
Servicers S-40
Responsibilities of Master Servicer S-40
Responsibilities of Special Servicer S-41
Extension Advisor S-42
The Operating Adviser S-42
Servicing and Other Compensation and Payment of Expenses S-43
Conflicts of Interest S-43
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT S-43
General S-43
Assignment Of The Mortgage Loans S-43
Trustee S-44
Collection Account and Certificate Account S-44
Reports To Certificateholders S-44
VOTING RIGHTS S-44
Termination S-45
USE OF PROCEEDS S-45
FEDERAL INCOME TAX CONSEQUENCES S-45
STATE TAX CONSIDERATIONS S-46
ERISA CONSIDERATIONS S-46
LEGAL INVESTMENT S-48
METHOD OF DISTRIBUTION S-48
LEGAL MATTERS S-50
RATING S-50
i
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to
the detailed information appearing elsewhere in this Prospectus Supplement and
in the accompanying Prospectus. Certain capitalized terms used in this Summary
are defined elsewhere in this Prospectus Supplement or in the Prospectus. See
"Index of Principal Definitions" herein and in the Prospectus.
Title of Certificates............ Mortgage Pass-Through Certificates,
Series 199 - (the
"Certificates").
Depositor........................ Heller Financial Commercial Mortgage
Asset Corp., a corporation
(the "Depositor"). See "The Depositor"
in the Prospectus.
Originators...................... %, %, %, % and % of the Mortgage Loans
by outstanding principal balance as of
the Cut-off Date (as defined herein)
were originated, respectively, by:
, a ;
, a ; , a
, and , a
.
Master Servicer.................. , a corporation. See
"Servicing-- Servicers" and "Servicing--
Responsibilities of Master Servicer" herein.
Special Servicer................. will be the Special Servicer
with respect to all the Mortgage Loans.
Trustee ......................... , a banking corporation.
Custodian........................ , a banking corporation,
in its capacity as custodian for the
Trustee (the "Custodian").
Cut-off Date .................... 1, 199 .
Delivery Date.................... On or about , 199 .
Distribution Dates............... Distributions on the Certificates will
be made by the Trustee, to the extent
of available funds, on the day of
each month or, if any such day is
not a business day, on the next
succeeding business day, beginning in
199 (each, a "Distribution
Date"), to the holders of record as of
the close of business on the last
business day of the month preceding the
month of each such distribution (each,
a "Record Date"). Notwithstanding the
above, the final distribution on any
Certificate will be made after due
notice by the Trustee of the pendency
of such distribution and only upon
presentation and surrender of such
Certificates at the location to be
specified in such notice.
Rated Final Distribution
Date............................. , 20 , which is the
second anniversary of the date at which
all the Mortgage Loans have zero
balances, assuming no prepayments and
that the Mortgage Loans which are
Balloon Mortgage Loans fully amortize
according to their amortization
schedule and no Balloon Payment is
made.
Registration of the Offered
Certificates..................... The Offered Certificates (the "DTC
Registered Certificates") will be
represented by one or more global
certificates registered in the name of
Cede & Co., as nominee of The
Depository Trust Company ("DTC"). No
person acquiring an interest in the DTC
Registered Certificates (any such
person, a "Beneficial Owner") will be
entitled to receive a Certificate of
<PAGE>
such class in fully registered,
certificated form (a "Definitive
Certificate"), except under the limited
circumstances described in the
Prospectus under "Description of the
Certificates
S-1
<PAGE>
-- Book-Entry Registration and Definitive
Certificates". Instead, DTC will effect
payments and transfers in respect of the DTC
Registered Certificates by means of its
electronic record keeping services, acting
through certain participating organizations
("Participants"). This may result in
certain delays in receipt of payments
by an investor and may restrict an
investor's ability to pledge its
securities. Unless and until Definitive
Certificates are issued, the rights of
Beneficial Owners may only be exercised
through DTC and its Participants and
will be subject to procedures
established thereby, except as
otherwise specified herein. See
"Description of the Certificates--
General" herein and "Description of the
Certificates-- Book-Entry Registration
and Definitive Certificates" in the
Prospectus.
Denominations.................... The DTC Registered Certificates will be
issuable on the book-entry records of
DTC and its Participants in
denominations of (except in the case of
the Interest Only Certificates) $ and
integral multiples of $ in excess
thereof. The Interest Only Certificates
will be issuable in denominations of $
Notional Amount and integral multiples
of $ Notional Amount.
The Mortgage Pool................ The Trust Fund will consist of a pool
(the "Mortgage Pool") of [fixed
rate] [floating rate] [partially fixed
rate and partially floating rate]
mortgage loans (the "Mortgage Loans")
secured by first liens on fee simple or
leasehold interests in multifamily,
retail, hotel, health care-related,
office, industrial and other commercial
properties (the "Mortgaged Properties")
located in states. See "Risk
Factors-- Ground Leases and Other
Leasehold Interests" herein. The
Mortgage Loans were originated for sale
to and were underwritten
generally in conformity with certain
guidelines established by
. See "Description of
the Mortgage Pool-- General" herein.
The Mortgage Loans will be acquired by
the Depositor from on or before
the Delivery Date. See "Description of
the Mortgage Pool -- Underwriting
Guidelines" herein. The Mortgage Loans
will have an aggregate principal
balance as of the Cut-off Date of
approximately $ and
individual principal balances as of the
Cut-off Date of at least $
but not more than $ with an
average principal balance of
approximately $ . The Mortgage
Loans will have terms to maturity from
the Cut-off Date of not more than
months, and a weighted average
remaining term to maturity of
approximately months as of the
Cut-off Date. The Mortgage Loans will
bear interest at Mortgage Interest
Rates of at least % per annum
but not more than % per
annum, with a weighted average Mortgage
Interest Rate of approximately
% per annum as of the Cut-
off Date. The Mortgage Loans provide
for scheduled payments of principal
and/or interest ("Monthly Payments") to
be due on the first day of each month
(the "Due Date").
Approximately % of the aggregate
principal balance of the Mortgage Loans
as of the Cut-off Date provide for
monthly payments of principal based on
an amortization schedule longer, and in
some cases significantly longer, than
the remaining term of such Mortgage
Loan (each, a "Balloon Mortgage Loan"),
thereby leaving a substantial
outstanding principal amount due and
payable (the "Balloon Payment") on its
maturity date, unless prepaid prior
thereto.
Except in certain limited
circumstances, each Mortgage Loan
either prohibits voluntary prepayments
during a certain number of years
following the origination thereof
and/or allows the borrower thereunder
(the "Mortgagor") to prepay the
principal balance thereof in whole or
in part during a certain number of
years following the origination if
accompanied by payment of a premium
(the
S-2
<PAGE>
"Prepayment Premium"). See Annex A
hereto and the table entitled
"Prepayment Lock-out/Prepayment Premium
Analysis" under "Description of the
Mortgage Pool -- Certain
Characteristics of the Mortgage Loans"
herein. Any Prepayment Premium
collected on a Mortgage Loan will be
distributed to the holders of the
Certificates as described herein. See
"Special Principal Payment
Considerations" below, "Risk Factors --
Special Prepayment Considerations",
"Description of the Certificates --
Distributions -- Interest Distributions
on the Certificates" and "Certain
Prepayment, Maturity and Yield
Considerations" herein and "Yield
Considerations" in the Prospectus.
In connection with its acquisition of
the Mortgage Loans, the Depositor will
obtain certain representations from
. will covenant with the
Depositor to cure any breach of such
representations and warranties or to
repurchase any Mortgage Loan in
connection with which there has been a
breach of a representation or warranty
which materially and adversely affects
the interest of the Certificateholders
in such Mortgage Loan. The Depositor
will assign such representations and
warranties and covenants to the Trustee
under the Pooling and Servicing
Agreement (as defined below). The sole
remedy available to the Trustee or the
Certificateholders is the obligation of
to cure any such breach or
repurchase any such Mortgage Loan.
For a further description of the
Mortgage Loans, see "Description of the
Mortgage Pool" herein.
The Offered Certificates........ The Certificates will be issued
pursuant to a pooling and servicing
agreement, to be dated as of the
Cut-off Date, among the Depositor, the
Master Servicer, the Special Servicer
and the Trustee (the "Pooling And
Servicing Agreement"). The Offered
Certificates will have the initial
Class Balances set forth on the cover
hereof. The Interest Only Certificates
will not have Class Balances. The Class
BCX Certificates consist of the
following components: the Class BCX
component B and the Class BCX component
C (each a "Component"). The Class BCX
component B and the Class BCX component
C are not separately transferrable.
Pass-Through Rate on the
Certificates .................. The Pass-Through Rates on the Class A1
and Class A2 Certificates are fixed and
are set forth on the cover hereof. The
Pass-Through Rates on the Class A1X and
Class A2X Certificates will be equal to
the weighted average of the Remittance
Rates in effect from time to time on
the Mortgage Loans minus the
Pass-Through Rates on the Class A1 and
Class A2 Certificates, respectively.
The Pass-Through Rates on the Class B
and Class C Certificates will equal the
weighted average of the Remittance
Rates in effect from time to time on
the Mortgage Loans minus the Pass-
Through Rates on the Class BCX
component B and the Class BCX component
C, respectively. The Class BCX
Certificates will be entitled to
interest at the Pass- Through Rate on
the components. The Pass- Through Rate
on the Class BCX component B is %
per annum and on the Class BCX
component C is % per annum. The
Pass- Through Rates on the Class D and
Class E Certificates will equal the
weighted average of the Remittance
Rates in effect from time to time on
the Mortgage Loans. The Remittance Rate
in effect for any Mortgage Loan as of
any date of determination is equal to
the excess of the Mortgage Interest
Rate thereon (without giving effect to
any modification or reduction thereof
following the Cut-off Date) over the
sum of the related Servicing Fee Rate
(as defined herein) and the fee payable
to the Trustee. The Mortgage Interest
Rate for each of the Mortgage Loans
which provide for the computation of
interest other than on the
S-3
<PAGE>
basis of a 360-day year consisting of
twelve 30-day months (a "30/360 Basis")
(that is the basis on which interest on
the Certificates accrues) will be
adjusted to reflect that difference.
Interest Distributions on
the Certificates................ Subject to the distribution of the
Principal Distribution Amount to the
Holders of classes of Certificates of a
higher priority as described under
"Priority of Distributions" below,
Holders of each class of Offered
Certificates will be entitled to
receive on each Distribution Date in
the order described herein, to the
extent of the Available Distribution
Amount (as defined herein) for such
Distribution Date (net of any interest
accrued on any Collateral Value
Adjustment subsequently recovered and
any Net Prepayment Premium (both, as
defined herein)) (the "Adjusted
Available Distribution Amount"),
distributions allocable to interest in
an amount (the "Interest Distribution
Amount") equal to the interest accrued
during the period from and including
the first day of the month preceding
the month of the Distribution Date (or
from the Cut-off Date, in the case of
the initial Distribution Date) to and
including the last day of the month
preceding the month of the Distribution
Date (based on a 360-day year
consisting of twelve 30-day months) on
the related Class Balance (or the
related Notional Amount, in the case of
the Interest Only Certificates, or any
component thereof) immediately prior to
such Distribution Date at the
then-applicable Pass-Through Rate (the
"Interest Accrual Amount") less such
class' (or component's) pro rata share,
by Interest Accrual Amount, of any
interest shortfall not related to a
Mortgagor delinquency or default, such
as Prepayment Interest Shortfalls to
the extent not offset as described
herein, and shortfalls associated with
exemptions provided by the Relief Act
(as defined in the Prospectus). The
Notional Amount of the Class A1X
Certificates will equal the Class
Balance of the Class A1 Certificates.
The Notional Amount of the Class A2X
Certificates will equal the Class
Balance of the Class A2 Certificates.
The Notional Amount of the Class BCX
component B will equal the Class
Balance of the Class B Certificates.
The Notional Amount of the Class BCX
component C will equal the Class
Balance of the Class C Certificates. A
Notional Amount does not entitle the
Interest Only Certificates to any
distributions of principal. If the
Adjusted Available Distribution Amount
for any Distribution Date is less than
the Interest Distribution Amount for
such Distribution Date, the shortfall
will be part of the Interest
Distribution Amount distributable to
holders of Offered Certificates on
subsequent Distribution Dates, to the
extent of available funds.
In addition to the related Interest
Distribution Amount, the Interest Only
Certificates will receive % of any
Net Prepayment Premium and the
remaining Offered Certificates will
receive % of any Net Prepayment
Premium, as more fully described
herein, to the extent not necessary to
reimburse the Master Servicer for
reductions in its compensation due to
Prepayment Interest Shortfalls. See "--
Special Yield Considerations" below and
"Description of the Certificates --
Distributions -- Interest Distributions
on the Certificates" herein.
The Available Distribution Amount for
any Distribution Date generally
includes: (i) scheduled payments on the
Mortgage Loans due on or prior to the
related Due Date immediately preceding,
and collected as of, the related
Determination Date (to the extent not
distributed on previous Distribution
Dates) and unscheduled payments and
other collections on the Mortgage Loans
collected during the related Remittance
Period, net of amounts payable or
reimbursable to the Master Servicer or
the Special Servicer therefrom and (ii)
S-4
<PAGE>
any P&I Advances made by the Master
Servicer or the Special Servicer for
the related Distribution Date. The
"Determination Date" for any
Distribution Date is the business
day preceding such Distribution Date.
The "Remittance Period" for any
Distribution Date is the period
beginning after a Determination Date in
the immediately preceding month (or the
Cut-off Date, in the case of the first
Distribution Date) through the related
Determination Date. See "Description of
the Certificates -- Distributions --
Interest Distributions on the
Certificates" herein.
Principal Distributions on
the Certificates................ Holders of the Certificates will be
entitled to receive on each
Distribution Date in reduction of the
related Class Balance in the order
described herein until the related
Class Balance is reduced to zero, to
the extent of the balance of the
Adjusted Available Distribution Amount
remaining after the payment of the
Interest Distribution Amount for such
Distribution Date for the classes of
Certificates with the highest priority
of payment for interest payments (as
described under "Priority of
Distributions" below) distributions in
respect of principal in an amount (the
"Principal Distribution Amount") equal
to the aggregate of (i) all scheduled
payments of principal (other than
Balloon Payments) due on the Mortgage
Loans on the related Due Date whether
or not received and all scheduled
Balloon Payments received, (ii) if the
scheduled Balloon Payment is not
received, with respect to any Balloon
Mortgage Loans on and after the
Maturity Date thereof, the principal
payment that would need to be received
in the related month in order to fully
amortize such Balloon Mortgage Loan
with level monthly payments by the end
of the term used to derive scheduled
payments of principal due prior to the
related Maturity Date, (iii) to the
extent not previously advanced, any
unscheduled principal recoveries
received during the related Remittance
Period in respect of the Mortgage
Loans, whether in the form of
liquidation proceeds, insurance
proceeds, condemnation proceeds or
amounts received as a result of the
purchase of any Mortgage Loan out of
the Trust Fund to the extent not
required to be otherwise applied
pursuant to the terms of the related
Mortgage Loan and (iv) any other
portion of the Adjusted Available
Distribution Amount remaining
undistributed after payment of any
interest payable on the Certificates,
including any Prepayment Interest
Excess (as defined herein) not offset
by any Prepayment Interest Shortfall
occurring during the related Remittance
Period or otherwise required to
reimburse the Master Servicer, as
described herein, and interest
distributions on the Mortgage Loans, in
excess of interest distributions on the
Certificates, resulting from the
application of the amounts described in
this clause (iv) to principal
distributions on the Certificates. See
"Description of the Certificates--
Distributions-- Principal Distributions
on the Offered Certificates" herein.
The Interest Only Certificates do not
have a Class Balance and are therefore
not entitled to any principal
distributions.
Priority of Distributions....... The Adjusted Available Distribution
Amount for any Distribution Date will
be applied (a) first, to distributions
of interest on the classes of
Certificates outstanding with highest
priority for interest payment (as
described below), (b) second, to
distributions of the Principal
Distribution Amount to the classes of
Certificates then entitled to
distributions of principal as described
below, and (c) third, to distributions
of interest on each class of
Certificates other than the classes
described in clause (a) above, in the
order of priority described below;
provided that on any Distribution Date
on which the Class Balance of a class
of Certificates is reduced to zero
pursuant to clause (b) above, interest
distributions pursuant to clause (a)
above will be made to the class of
Certificates outstanding
S-5
<PAGE>
with the next highest priority for
interest payments prior to making
distributions of the Principal
Distribution Amount thereto pursuant to
clause (b) above. The priority for
interest payments for purposes of
clauses (a) and (c), above, is: first
to distributions of interest on the
Class A1, Class A1X, Class A2 and Class
A2X Certificates, pro rata, based on
their respective Interest Accrual
Amounts; second, to the Class B and
Class BCX component B Certificates, pro
rata, based on their respective
Interest Accrual Amounts; third, to the
Class C and the Class BCX component C
Certificates, pro rata, based on their
respective Interest Accrual Amounts;
fourth, to the Class D Certificates;
fifth, to the Class E Certificates; and
then to the remaining classes of
Certificates up to their respective
Interest Accrual Amounts, all as
described under "Interest Distributions
on the Certificates" above. The
Principal Distribution Amount for such
Distribution Date will be applied to
the payment of principal of the Class
A1, Class A2, Class B, Class C, Class D
and Class E Certificates, in that
order, and then to the remaining
classes of Certificates, until their
respective Class Balances have been
reduced to zero. Any Net Prepayment
Premium for any Distribution Date will
be applied to reimburse the Master
Servicer for reductions in its
compensation due to Prepayment Interest
Shortfalls, as described herein, and
then to distributions on the
Certificates, as described herein. In
addition, to the extent any amounts
corresponding to a Collateral Value
Adjustment are recovered on a Mortgage
Loan, any interest accrued on any class
of Certificates and not paid as a
result of such Collateral Value
Adjustment shall be allocated to such
classes as described herein. See
"Description of the Certificates--
Subordination" herein.
P&I Advances................... The Master Servicer and the Special
Servicer (each, a "Servicer") are
required to make advances ("P&I
Advances") for delinquent Monthly
Payments on the Mortgage Loans, subject
to the limitations described herein.
None of the Servicers will be required
to advance the full amount of any
Balloon Payment not made by the related
Mortgagor. To the extent a Servicer is
required to make a P&I Advance on and
after the Due Date for a Balloon
Payment, such P&I Advance shall not
exceed an amount equal to the monthly
payment calculated by the Special
Servicer necessary to fully amortize
the related Mortgage Loan over the
period used for purposes of calculating
the scheduled monthly payments thereon
prior to the related Maturity Date. As
more fully described herein, each
Servicer making a P&I Advance (or any
other advance) will be entitled to
reimbursement thereof and interest
thereon at the prime rate determined in
accordance with the Pooling and
Servicing Agreement to the extent
provided therein. See "Description of
the Certificates-- Advances" herein and
"Description of the Certificates--
Advances in Respect of Delinquencies"
in the Prospectus.
Other Certificates............. The Class F, Class G, Class NR, Class
R-I, Class R-II and Class R-III
Certificates are not offered hereby
(the "Other Certificates"). The
Pass-Through Rates on the Class F,
Class G and Class NR Certificates will
equal the weighted average of the
Remittance Rates in effect from time to
time on the Mortgage Loans. The Class
Balances on the Class F, Class G and
Class NR Certificates will equal
$ , $ and
$ , respectively, and
approximately $ , in the
aggregate. The Class R-I, Class R-II
and Class R- III Certificates will not
have a Pass-Through Rate or a Class
Balance.
Subordination.................. Neither the Offered Certificates nor
the Mortgage Loans are insured or
guaranteed against losses suffered on
the Mortgage Loans by any government
S-6
<PAGE>
agency or instrumentality or by the
Depositor, the Trustee, the
Underwriter, the Master Servicer, the
Special Servicer or any affiliate
thereof.
Realized Losses and Collateral
Valuation Adjustments (as defined
herein) on the Mortgage Loans will be
allocated, first, to the Other
Certificates, second, to the Class E
Certificates, third, to the Class D
Certificates, fourth, to the Class C
Certificates, fifth to the Class B
Certificates, and thereafter, to the
Class A1 and Class A2 Certificates, on
a pro rata basis, based on Class
Balance, in each case until the related
Class Balance is reduced to zero. Any
allocation of a Realized Loss or a
Collateral Valuation Adjustment to a
class of Certificates will result in a
reduction of the related Class Balance
and the Notional Amount of any of the
Interest Only Certificates (or
component thereof) calculated by
reference to such Class Balance. In
addition, the Adjusted Available
Distribution Amount will be applied in
the order set forth under "Priority of
Distributions" above.
In addition to Realized Losses and
Collateral Valuation Adjustments,
shortfalls may also occur as a result
of each Servicer's right to receive
payments of interest with respect to
unreimbursed advances, the Special
Servicer's right to compensation with
respect to Mortgage Loans which are or
have been Specially Serviced Mortgage
Loans and as a result of other Trust
Fund expenses. Such shortfalls will be
allocated to the classes of
Certificates with the lowest payment
priority for purposes of the
application of the Adjusted Available
Distribution Amount in the order
described herein.
Optional Termination............ At its option, the Master Servicer, the
Special Servicer, any holder of a Class
R-I Certificate and the holders of an
aggregate Percentage Interest in excess
of 50% of the Most Subordinate Class of
Certificates (as defined herein) may
purchase all of the Mortgage Loans, at
the price set forth under "Description
of the Pooling and Servicing
Agreement-- Termination" herein, and
thereby effect termination of the Trust
Fund and early retirement of the then
outstanding Certificates, on any
Distribution Date on which the
aggregate Stated Principal Balance (as
defined herein) of the Mortgage Loans
remaining in the Trust Fund is less
than % of the aggregate principal
balance of the Mortgage Loans as of the
Cut-off Date. See "Description of the
Pooling and Servicing Agreement --
Termination" herein and "Description of
the Certificates -- Termination" in the
Prospectus.
Special Principal Payment
Considerations.................. The rate and timing of principal
payments, if any, on the Offered
Certificates will depend, among other
things, on the rate and timing of
principal payments (including
prepayments, defaults, liquidations and
purchases of Mortgage Loans due to a
breach of a representation and
warranty) on the Mortgage Loans. As
described herein, each of the Mortgage
Loans prohibits, and/or requires the
payment of a Prepayment Premium in
connection with, any voluntary
prepayment during certain specified
times. See "The Mortgage Pool" above
and "Description of the Mortgage Pool"
herein.
All classes of Offered Certificates
entitled to payments of principal are
subject to priorities for payment of
principal as described herein.
Distributions of principal on classes
having an earlier priority of payment
will be directly affected by the rates
of prepayments of the Mortgage Loans.
The timing of commencement of principal
distributions and the weighted average
lives of classes of Certificates with a
later priority of payment will be
affected by the rates of prepayments
experienced both before and after the
commencement of principal distributions
on such classes.
S-7
<PAGE>
In addition, a portion of collections
on the Mortgage Loan in excess of
scheduled and unscheduled principal
distributions will be allocated to the
classes of Certificates then entitled
to distributions of principal. Any such
allocation may result in a faster
amortization of such class of
Certificates.
Special Yield Considerations..... The yield to maturity on each class of
the Offered Certificates will depend
on, among other things, the rate and
timing of principal payments (including
prepayments, defaults, liquidations and
purchases of Mortgage Loans due to
breaches of representations and
warranties) on the Mortgage Loans and
the allocation thereof to reduce the
Class Balance or Notional Amount of
such class (or component thereof). The
yield to maturity on each class of the
Offered Certificates will also depend
on the Pass-Through Rate and the
purchase price for such Certificates.
The yield to investors on any class of
Offered Certificates will be adversely
affected by any allocation thereto of
Prepayment Interest Shortfalls on the
Mortgage Loans, which may result from
the distribution of interest only to
the date of a prepayment occurring
during any month following the related
Determination Date (rather than a full
month's interest). See "Description of
the Certificates-- Distributions--
Interest Distributions on the
Certificates" herein.
In general, if a class of Offered
Certificates is purchased at a premium
and principal distributions thereon
occur at a rate faster than anticipated
at the time of purchase, the investor's
actual yield to maturity will be lower
than that assumed at the time of
purchase. Conversely, if a class of
Offered Certificates is purchased at a
discount and principal distributions
thereon occur at a rate slower than
that assumed at the time of purchase,
the investor's actual yield to maturity
will be lower than that assumed at the
time of purchase.
The multiple class structure of the
Offered Certificates causes the yield
of certain classes to be particularly
sensitive to changes in the rates of
principal payments (including
prepayments, defaults, liquidations and
purchases of Mortgage Loans due to a
breach of a representation and
warranty) of the Mortgage Loans and
other factors.
The yield to investors on the Interest
Only Certificates will be sensitive to
the rate and timing of prepayments,
defaults and liquidations on the
Mortgage Loans. The rate of such
prepayments, defaults and liquidations
on the Mortgage Loans may fluctuate
significantly over time. A
significantly faster than expected rate
of such prepayments, defaults and
liquidations on the Mortgage Pool will
have a negative effect on the yield to
such investors and could result in the
failure of investors in the Interest
Only Certificates to recover their
initial investments. In addition,
because holders of the Class A1X and
A2X Certificates have rights to
relatively larger portions of interest
payments on Mortgage Loans with higher
Mortgage Interest Rates than on
Mortgage Loans with lower Mortgage
Interest Rates, and because Mortgage
Loans with higher Mortgage Interest
Rates are generally likely to prepay at
a faster rate than Mortgage Loans with
lower Mortgage Interest Rates, the
yield on the Class A1X and A2X
Certificates will be materially
adversely affected to a greater extent
than the yields on the other Offered
Certificates if the Mortgage Loans with
higher Mortgage Interest Rates prepay
faster than the Mortgage Loans with
lower Mortgage Interest Rates. See
"Certain Prepayment, Maturity and Yield
Considerations," especially "--Interest
Only Certificate Yield Considerations"
herein.
The yield to investors on any of the
Certificates will be sensitive to
losses due to defaults on the Mortgage
Loans (and the timing thereof), because
the amount of
S-8
<PAGE>
such losses will be allocable to such
class to the extent such losses are not
covered by a subordinate class of
Certificates, as described herein.
Furthermore, as described herein, the
timing of receipt of principal and
interest by any such class of
Certificates may be adversely affected
by losses even if such class does not
ultimately bear such loss.
Each Servicer making an advance will be
entitled to interest thereon at the
prime rate determined in accordance
with the Pooling and Servicing
Agreement to the extent provided
therein. Therefore losses may be
allocated to a class of Offered
Certificates with respect to any
delinquent Monthly Payment and certain
other expenses advanced by such
Servicer.
The Special Servicer will be entitled
to receive compensation in the form of
a percentage of collections of any
Mortgage Loan which is being serviced
or has been serviced by the Special
Servicer (a "Specially Serviced
Mortgage Loan") prior to the right of
Certificateholders to receive
distributions on the Certificates. Such
compensation will result in shortfalls
which will be allocated to the classes
of Certificates with the lowest payment
priority for purposes of application of
the Adjusted Available Distribution
Amount in the order described herein.
Consequently, it is possible that
losses will be allocated to the Offered
Certificates with respect to any
Specially Serviced Mortgage Loan
notwithstanding the fact that such
Mortgage Loan is returned to a
performing status. See "Servicing --
Servicing and Other Compensation and
Payment of Expenses" herein.
See "Certain Prepayment, Maturity and
Yield Considerations," especially
"--Class C, Class BCX, Class D and
Class E Yield Considerations" herein,
and "Yield Considerations" in the
Prospectus.
Federal Income Tax
Consequences................. Three separate real estate mortgage
investment conduit ("REMIC") elections
will be made with respect to the Trust
Fund for federal income tax purposes.
Upon the issuance of the Offered
Certificates, Latham & Watkins, counsel
to the Depositor, will deliver its
opinion generally to the effect that,
assuming compliance with all provisions
of the Pooling and Servicing Agreement,
for federal income tax purposes, the
REMIC I, REMIC II and REMIC III (each
as defined in the Pooling and Servicing
Agreement) will each qualify as a REMIC
under Sections 860A through 860G of the
Internal Revenue Code of 1986 (the
"Code").
For federal income tax purposes, the
Class R-I Certificates will be the sole
class of "residual interests" in REMIC
I, the Class R-II Certificates will be
the sole class of "residual interests"
in REMIC II, the Offered Certificates
(or, in the case of the Class BCX
Certificates, each component thereof)
and the Other Certificates will be
"regular interests" of REMIC III and
will generally be treated as debt
instruments of REMIC III, and the Class
R-III Certificates will be the sole
class of "residual interests" in REMIC
III.
The Interest Only Certificates will and
the other Offered Certificates may be
treated as having been issued with
original issue discount for federal
income tax purposes. For purposes of
computing the accrual of original issue
discount, market discount and premium,
if any, for federal income tax purposes
it will be assumed that there are no
prepayments on the Mortgage Loans.
However, no representation is made that
the Mortgage Loans will not prepay at
another rate.
S-9
<PAGE>
For further information regarding the
federal income tax consequences of
investing in the Offered Certificates,
see "Federal Income Tax Consequences"
herein and in the Prospectus.
ERISA Considerations............ A fiduciary of any employee benefit
plan or other retirement arrangement
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code
and any entity whose underlying assets
include assets of such a plan by reason
of any such plan's investment in the
entity should review carefully with its
legal advisors whether the purchase or
holding of any class of Offered
Certificates could give rise to a
transaction that is prohibited or is
not otherwise permitted either under
ERISA or Section 4975 of the Code or
whether there exists any statutory or
administrative exemption applicable to
an investment therein. The U.S.
Department of Labor has issued an
individual exemption, Prohibited
Transaction Exemption 90-24, to the
Underwriter that generally exempts from
the application of certain of the
prohibited transaction provisions of
Section 406 of ERISA, and the excise
taxes imposed on certain prohibited
transactions by Sections 4975(a) and
(b) of the Code and Section 502(i) of
ERISA, transactions relating to the
purchase, sale and holding of
pass-through certificates underwritten
by the Underwriter, such as the Class
A1, Class A1X, Class A2 and Class A2X
Certificates and the servicing and
operation of asset pools, provided that
certain conditions are satisfied.
Purchasers using insurance company
general account funds to effect such
purchase should consider the
availability of Prohibited Transaction
Class Exemption 95-60 (60 Fed. Reg.
35925, July 12, 1995) issued by the
U.S. Department of Labor. See "ERISA
Considerations" herein and in the
Prospectus.
Rating.......................... It is a condition to the issuance of
the Class A1 and Class A2 Certificates
that they be rated " " by
(" ") and
(" "). It is a condition
of the issuance of the Class A1X and
Class A2X Certificates that they be
rated " " by and
" " by . It is a
condition of the issuance of the Class
B Certificates that they be rated not
lower than " " by
and . It is a condition
of the issuance of the Class C
Certificate that they be rated not
lower than "___" by
and " " by . It is a
condition of the issuance of the Class
BCX Certificates that they be rated not
lower than " " by .
It is a condition of the issuance of
the Class D Certificates that they be
rated not lower than " " by
and .
It is a condition of the issuance of
the Class E Certificates that they be
rated not lower than " " by
and .
A security rating is not a
recommendation to buy, sell or hold
securities and may be subject to
revision or withdrawal at any time by
the assigning rating organization. A
security rating does not address the
frequency or likelihood of prepayments
(whether voluntary or involuntary) of
Mortgage Loans, or the degree to which
such prepayments might differ from
those originally anticipated, or the
likelihood of collection of Prepayment
Premiums, or the corresponding effect
on yield to investors. A rating of any
of the Interest Only Certificates does
not address the possibility that the
holders of such Certificates may fail
to fully recover their initial
investments due to a rapid rate of
prepayments, defaults or liquidations.
See "Certain Prepayment, Maturity and
Yield Considerations" herein, "Risk
Factors," and "Rating" herein and in
the Prospectus and "Yield
Considerations" in the Prospectus.
S-10
<PAGE>
Legal Investment............... The Class , Class , Class , Class and Class
Certificates will be "mortgage related
securities" within the meaning of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") so long as they are rated in
one of the two highest rating categories by
at least one nationally recognized
statistical rating organization. The Class
___, Class ___ and Class ___ Certificates
will not be "mortgage related securities"
within the meaning of SMMEA. The appropriate
characterization of the Offered Certificates
under various legal investment restrictions,
and thus the ability of investors subject to
these restrictions to purchase any Class of
Offered Certificates, may be subject to
significant interpretative uncertainties.
In addition, institutions whose investment
activities are subject to review by certain
regulatory authorities may be or may become
subject to restrictions, which may be
retroactively imposed by such regulatory
authorities, on the investment by such
institutions in certain forms of
mortgage-backed securities. Furthermore,
certain states have enacted legislation
overriding the legal investment provisions of
SMMEA. Accordingly, investors should consult
their own legal advisors to determine whether
and to what extent the Offered Certificates
constitute legal investments for them. See
"Legal Investment" herein and in the
Prospectus.
S-11
<PAGE>
RISK FACTORS
[Description Will Depend On The Particulars Of The Mortgage Assets]
Prospective purchasers of the Offered Certificates should consider,
among other things, the following risk factors (as well as the risk factors set
forth under "Risk Factors" in the Prospectus) in connection with an investment
in the Offered Certificates.
Special Prepayment Considerations. The rate and timing of principal
payments on the Offered Certificates will depend, among other things, on the
rate and timing of principal payments (including prepayments, defaults,
liquidations and purchases of Mortgage Loans due to a breach of representation
and warranty) on the Mortgage Loans. The rate at which principal payments occur
on the Mortgage Pool will be affected by a variety of factors, including,
without limitation, the terms of the Mortgage Loans, the level of prevailing
interest rates, the availability of mortgage credit and economic, demographic,
geographic, tax, legal and other factors. In general, however, if prevailing
interest rates fall significantly below the Mortgage Interest Rates on the
Mortgage Loans, such Mortgage Loans are likely to be the subject of higher
principal prepayments than if prevailing rates remain at or above the rates
borne by such Mortgage Loans. The rate of principal payments on the Offered
Certificates will correspond to the rate of principal payments on the Mortgage
Loans and is likely to be affected by the Lock-out Periods (as defined herein)
and Prepayment Premium provisions applicable to the Mortgage Loans and by the
extent to which a Servicer is able to enforce such provisions. Mortgage Loans
with a Lock-out Period or a Prepayment Premium provision, to the extent
enforceable, generally would be expected to experience a lower rate of
principal prepayments than otherwise identical mortgage loans without such
provisions with shorter Lock-out Periods or with lower Prepayment Premiums. See
"Description of the Mortgage Pool," "Description of the Certificates --
Distributions -- Priority of Distributions" and "Certain Prepayment, Maturity
and Yield Considerations" herein and "Yield Considerations" in the Prospectus.
Special Yield Considerations. The yield to maturity on each class
of the Offered Certificates will depend, among other things, on the rate and
timing of principal payments (including prepayments, defaults, liquidations and
purchases of Mortgage Loans due to a breach of representation and warranty) on
the Mortgage Pool and the allocation thereof to reduce the Class Balance of
such class. Mortgage Loans with higher Mortgage Interest Rates will have higher
Remittance Rates, and therefore, the yield on the Class A1X, Class A2X, Class
B, Class C, Class D and Class E Certificates could be adversely affected if
Mortgage Loans with higher Mortgage Interest Rates pay faster than the Mortgage
Loans with lower Mortgage Interest Rates. The yield to investors on the Offered
Certificates will be adversely affected by any allocation thereto of interest
shortfalls on the Mortgage Loans, such as Prepayment Interest Shortfalls.
Neither the Certificates nor the Mortgage Loans are guaranteed by any
governmental entity or instrumentality or any other entity.
In general, if a Certificate is purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a Certificate is purchased
at a discount and principal distributions thereon occur at a rate slower than
that assumed at the time of purchase, the investor's actual yield to maturity
will be lower than assumed at the time of purchase. See "Prepayment, Maturity
and Yield Considerations" herein and "Yield Considerations" in the Prospectus.
Delinquency and Default Risks of Commercial and Multifamily
Mortgage Loans. The Mortgage Loans are secured by a fee simple or leasehold
interest in multifamily, retail, hotel, health care-related, office, industrial
and other commercial properties. Commercial and multifamily lending is
generally viewed as exposing the lender to a greater risk of loss than one- to
four-family residential lending. Commercial and multifamily lending typically
involves larger loans to single borrowers or groups of related borrowers than
residential one- to four-family mortgage loans. In addition, and unlike the
case of loans made on the security of single-family residences, repayment of
loans made on the security of income-producing real property depends upon the
ability of that property (i) to generate rental income sufficient to pay
operating expenses, to make necessary repairs, tenant improvements and capital
improvements and to pay debt service and (ii) in the case of loans that do not
fully
S-12
<PAGE>
amortize over their terms, to retain sufficient value to permit the borrower to
pay off the loan at maturity by sale or refinancing. A number of factors, many
beyond the control of the property owner, can affect the ability of an
income-producing real estate project to generate sufficient net operating
income to pay debt service and/or to maintain its value. Among these factors
are economic conditions generally and in the area of the project, the age,
quality and design of the project and the degree to which it competes with
other projects in the area, changes or continued weaknesses in specific
industry segments, increases in operating costs, the willingness and ability of
the owner to provide capable property management and maintenance and the degree
to which the project's revenue is dependent upon a single tenant or user, a
small group of tenants, or tenants concentrated in a particular business or
industry. If leases are not renewed or replaced, if tenants default, if rental
rates fall and/or if operating expenses increase, the borrower's ability to
repay the loan may be impaired and the resale value of the property, which is
substantially dependent on the property's ability to generate income, may
decline. In addition, there are other factors, including changes in zoning or
tax laws, the availability of credit for financing, and changes in interest
rate levels that may adversely affect the value of a project (and thus the
borrower's ability to sell or refinance) without necessarily affecting the
ability to generate current income Commercial and multifamily real estate can
be affected significantly by the supply and demand in the market for the type
of property securing the loan and, therefore, may be subject to adverse
economic conditions.
Property Management. The successful operation of a real estate
project is also dependent on the performance and viability of the property
manager of such project. The property manager is responsible for responding to
changes in the local market, planning and implementing the rental structure,
including establishing appropriate rental rates, and advising the borrowers so
that maintenance and capital improvements can be carried out in a timely
fashion. There is no assurance regarding the performance of any operators
and/or managers or persons who may become operators and/or managers upon the
expiration or termination of leases or management agreements or following any
default or foreclosure under a Mortgage Loan.
Limitations of Appraisals. An appraisal or other market analysis
was conducted in respect of the Mortgaged Properties in connection with the
origination or acquisition of the related Mortgage Loan, and the resulting
estimates of value are the bases of the Cut-off Date LTV Ratios referred to
herein. However, those estimates represent the analysis and opinion of the
person performing the appraisal of market analysis and are not guarantees of
present or future values. Moreover, the values of the Mortgaged Properties may
have fluctuated significantly since the appraisal or market study was
performed. In addition, appraisals seek to establish the amount a typically
motivated buyer would pay a typically motivated seller. Such amount could be
significantly higher than the amount obtained from the sale of a Mortgaged
Property under a distress or liquidation sale.
Nonrecourse Mortgage Loans. Substantially all of the Mortgage Loans
are nonrecourse loans as to which, in the event of a default under any such
Mortgage Loan, recourse generally may be had only against the related Mortgaged
Property. Consequently, payment of each such Mortgage Loan prior to maturity is
dependent primarily on the sufficiency of the net operating income of the
related Mortgaged Property, and at maturity (whether at scheduled maturity or
in the event of a default upon the acceleration of such maturity after
default), upon the then market value of the related Mortgaged Property, or the
ability to refinance such Mortgage Loan.
Concentration of Mortgage Loans. The average principal balance of
the Mortgage Loans as of the Cut-off Date is approximately $____________, which
is equal to ____% of the aggregate principal balance as of the Cut-off Date of
the Mortgage Loans.
A mortgage pool consisting of fewer loans each having a relatively
higher outstanding principal balance may result in losses that are more severe,
relative to the size of the pool, than would be the case if the pool consisted
of a greater number of mortgage loans each having a relatively smaller
outstanding principal balance. In addition, the concentration of any mortgage
pool in one or more loans that have outstanding principal balances that are
substantially larger than the other mortgage loans in such pool can result in
losses that are substantially more severe, relative to the size of the pool,
than would be the case if the aggregate balance of the pool were more evenly
distributed among the loans in such pool. The Mortgage Loan secured by the
__________________________ represents______% of the aggregate principal balance
of the Mortgage Loans. No other Mortgage Loan represents
S-13
<PAGE>
more than ____% of the aggregate principal balance as of the Cut-off Date of
the Mortgage Loans. Mortgage Loans with related Mortgagors represent in the
aggregate _____% of the aggregate principal balance as of the Cut-off Date of
the Mortgage Loans but no single group of related Mortgagors represents in
excess of __% of the aggregate principal balance of the Mortgage Loans. See
"Description of the Mortgage Pool -- Certain Characteristics of the Mortgage
Loans -- Related Borrowers and Other Issues" herein.
Risks of Different Timing of Mortgage Loan Amortization. If and as
principal payments, property releases, or prepayments are made on a Mortgage
Loan, the remaining Mortgage Pool may be subject to more concentrated risk with
respect to the diversity of properties, types of properties and property
characteristics and with respect to the number of borrowers. See the table
entitled "Year of Scheduled Maturity" under "Description of the Mortgage Pool
- -- Certain Characteristics of the Mortgage Loans" for a description of the
respective maturity dates of the Mortgage Loans. Because principal on the
Offered Certificates is payable in sequential order, and no class receives
principal until the Class Balance of the preceding class or classes has been
reduced to zero, classes that have a lower sequential priority are more likely
to be exposed to the risk of concentration discussed under "--Concentration of
Mortgage Loans" above than classes with a higher sequential priority.
Geographic Concentration. __, __, __, __ and __ of the Mortgaged
Properties, representing approximately ____%, ____%, ____%, ____% and ____%,
respectively, of the aggregate principal balance of the Mortgage Loans as of
the Cut-off Date, are located in ______________, _________, __________,
_________ and _________, respectively. Except as indicated in the immediately
preceding sentence, no more than ___% of the Mortgage Loans, by aggregate
principal balance of the Mortgage Loans as of the Cut-off Date are secured by
Mortgaged Properties in any one state. Repayments by borrowers and the market
value of the Mortgaged Properties could be affected by economic conditions
generally or in regions where the borrowers and the Mortgaged Properties are
located, conditions in the real estate market where the Mortgaged Properties
are located, changes in governmental rules and fiscal policies, acts of nature,
including earthquakes (which may result in uninsured losses), and other factors
which are beyond the control of the borrowers.
Environmental Risks. 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 and
remediation of hazardous or toxic substances on, under, adjacent to or in such
property. Such laws often impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of such hazardous or toxic
substances. The cost of any required remediation and the owner's liability
therefor as to any property is generally not limited under such enactments and
could exceed the value of the property and/or the aggregate assets of the
owner. In addition, the presence of hazardous or toxic substances, or the
failure to properly remediate such property, may adversely affect the owner's
or operator's ability to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances may also
be liable for the costs of removal or remediation of such substances at the
disposal or treatment facility. Certain laws impose liability for release of
asbestos containing materials ("ACMs") into the air. Third parties may seek
recovery from owners or operators of real properties for personal injury and/or
tort damage associated with exposure to ACMs or other hazardous substances. The
presence of, or strong potential for contamination by, hazardous substances at,
on, under, adjacent to, or in a property can materially adversely affect the
value of the property and a borrower's ability to repay its mortgage loan).
Under some environmental laws, such as the federal Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended
("CERCLA"), as well as certain state laws, a secured lender (such as the Trust
Fund) may be liable as an "owner" or "operator", for the costs of responding to
a release or threat of a release of hazardous substances on or from a
borrower's property, if agents or employees of a lender are deemed to have
participated in the management of the borrower's property. The Trust Fund's
potential exposure to liability for cleanup costs pursuant to CERCLA may
increase if the Trust Fund actually takes possession of a borrower's property,
or control of its day-to-day operations, as for example through the appointment
of a receiver.
S-14
<PAGE>
An environmental site assessment ("ESA") of each of the Mortgaged
Properties was performed (or prior assessments were updated) in connection with
the initial underwriting and origination of the Mortgage Loans. In certain
cases, environmental testing in addition to the ESA was performed.
It is possible that the ESAs did not reveal all environmental
liabilities, that there are material environmental liabilities of which neither
___ nor the Depositor are aware. Moreover, there can be no assurance that
future laws, ordinances or regulations will not impose any material
environmental liability or that the environmental condition of the Mortgaged
Properties in the future could be affected by tenants and occupants or by third
parties unrelated to the Mortgagors, or by the condition of land or operations
in the vicinity of the Mortgaged Properties.
The Pooling and Servicing Agreement provides that the Special
Servicer, acting on behalf of the Trust Fund, may not acquire, through
foreclosure or deed in lieu thereof, title to a Mortgaged Property or take over
its operation unless the Special Servicer has previously determined, based on a
report prepared by a qualified person who regularly conducts environmental
audits, that (i) the Mortgaged Property is in compliance with applicable
environmental laws or that taking the actions necessary to comply with such
laws is reasonably likely to produce a greater recovery on a present value
basis than not taking such actions and (ii) there are no circumstances known to
the Special Servicer relating to the use of hazardous substances or
petroleum-based materials which require investigation or remediation, or that
if such circumstances exist, taking such remedial actions is reasonably likely
to produce a greater recovery on a present value basis than not taking such
actions. Although such requirement decreases the likelihood that the Trust Fund
will become liable for a material adverse environmental condition at a
Mortgaged Property, there can be no assurance that the requirements of the
Pooling and Servicing Agreement will effectively insulate the Trust Fund from
potential liability for a materially adverse environmental condition at any
Mortgaged Property.
Litigation. There may be legal proceedings pending and, from time
to time, threatened against the Mortgagors and the managers of the Mortgaged
Properties and their respective affiliates arising out of the ordinary business
of the Mortgagor, the managers and such affiliates. There can be no assurance
that such litigation may not have a material adverse effect on distributions to
Certificateholders.
Other Financings. Each Mortgagor is restricted from incurring any
indebtedness secured by the related Mortgaged Property other than the related
Mortgage Loan without the consent of the lender. With respect to ___ Mortgage
Loans representing ______% of the Mortgage Pool and which were made to single
purpose entities, the Mortgagor is restricted from incurring any indebtedness
other than the Mortgage Loan, normal trade accounts payable and certain
purchase financing debt, except that _____ of these Mortgagors representing
____% of the Mortgage Pool have unsecured subordinate debt that is subject to a
subordination and standstill agreement limiting the rights of the holder of
such additional indebtedness including limitations on its right to commence any
enforcement or foreclosure proceeding. In addition, ____ of the Mortgagors
representing __% of the Mortgage Pool have incurred indebtedness secured by
equity interests in such Mortgagors.
In cases where one or more junior liens are imposed on a Mortgaged
Property or the Mortgagor incurs other indebtedness, the Trust Fund is
subjected to additional risks, including, without limitation, the risks that
the Mortgagor may have greater incentives to repay the junior or unsecured
indebtedness first and that it may be more difficult for the Mortgagor to
refinance the Mortgage Loan or to sell the Mortgaged Property for purposes of
making the Balloon Payment upon the maturity of the Mortgage Loan.
Effect of Mortgagor Delinquencies and Defaults. The aggregate
amount of distributions on the Offered Certificates, the yield to maturity of
the Offered Certificates, the rate of principal payments on the Offered
Certificates and the weighted average lives of the Offered Certificates will be
affected by the rate and the timing of delinquencies and defaults on the
Mortgage Loans. If a purchaser of a class of Offered Certificates calculates
its anticipated yield based on an assumed rate of default and amount of losses
on the Mortgage Loans that is lower than the default rate and amount of losses
actually experienced and such additional losses are allocable to such class of
Certificates, such purchaser's actual yield to maturity will be lower than that
so calculated and could, under certain extreme scenarios, be negative. The
timing of any loss on a liquidated Mortgage Loan will also affect the actual
S-15
<PAGE>
yield to maturity of the class of Offered Certificates to which a portion of
such loss is allocable, even if the rate of defaults and severity of losses are
consistent with an investor's expectations. In general, the earlier a loss
borne by an investor occurs, the greater is the effect on such investor's yield
to maturity.
As and to the extent described herein, each Servicer will be
entitled to receive interest on unreimbursed P&I Advances and unreimbursed
advances of servicing expenses until such advances (i) are recovered out of
amounts received on the Mortgage Loan as to which such advances were made
pursuant to the Pooling and Servicing Agreement, which amounts are in the form
of late payments, liquidation proceeds, insurance proceeds, condemnation
proceeds or amounts paid in connection with the purchase of such Mortgage Loan
out of the Trust Fund or (ii) are otherwise recovered following a determination
that such advance is a nonrecoverable advance. Each Servicer's right to receive
such payments of interest is prior to the rights of Certificateholders to
receive distributions on the Certificates and, consequently, is likely to
result in losses being allocated to the Offered Certificates that would not
otherwise have resulted absent the accrual of such interest.
The Special Servicer will be entitled to receive, with respect to
each Mortgage Loan which is or was at some time a Specially Serviced Mortgage
Loan, compensation in the form of a percentage of collections of any such
Specially Serviced Mortgage Loan prior to the right of Certificateholders to
receive distributions on the Certificates. Consequently, it is possible that
shortfalls will be allocated to the Offered Certificates with respect to any
Mortgage Loan which is or was at some time a Specially Serviced Mortgage Loan
notwithstanding the fact that such Mortgage Loan is returned to a performing
status. See "Servicing -- Servicing and Other Compensation and Payment of
Expenses" herein.
Regardless of whether losses ultimately result, delinquencies and
defaults on the Mortgage Loans may significantly delay the receipt of payments
by the holder of a class of Offered Certificates, to the extent that P&I
Advances or the subordination of another class of Certificates does not fully
offset the effects of any such delinquency or default. The Special Servicer has
the ability to extend and modify Mortgage Loans that are in default or as to
which a payment default is imminent, including the ability to extend the date
on which a Balloon Payment is due, subject to certain conditions described in
the Pooling and Servicing Agreement. A Servicer's obligation to make P&I
Advances in respect of a Mortgage Loan that is delinquent as to its Balloon
Payment is limited, however, to the extent described under "Description of the
Certificates -- Advances." Until such time as any Mortgage Loan delinquent in
respect of its Balloon Payment is liquidated, the entitlement of the holders of
any class of Offered Certificates on each Distribution Date in respect of
principal of such Mortgage Loan will be limited to any payment made by the
related Mortgagor and any related P&I Advance made by a Servicer. Consequently,
any delay in the receipt of a Balloon Payment that is payable, in whole or in
part, to holders of the Offered Certificates will extend the weighted average
life of the Offered Certificates.
As described under "Description of the Certificates --
Distributions" herein, if the portion of the Adjusted Available Distribution
Amount distributable in respect of interest on any class of Offered
Certificates on any Distribution Date is not sufficient to distribute the
Interest Distribution Amount then payable for such class, the shortfall will be
distributable to holders of such class of Certificates on subsequent
Distribution Dates, to the extent of available funds.
Balloon Payments. __________Mortgage Loans, representing_____% of
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date,
are Balloon Mortgage Loans. Balloon Mortgage Loans involve a greater degree of
risk because the ability of a Mortgagor to make a Balloon Payment typically
depends on his ability either to refinance the loan or to sell the related
Mortgaged Property. See "Risk Factors -- Balloon Payments" in the Prospectus.
Leasehold Considerations. ____ Mortgage Loans, representing ___% of
the Initial Pool Balance, are secured solely by Mortgages on the borrowers'
leasehold interests under ground leases. In addition, ___ Mortgage Loans, which
represent ___% of the Initial Pool Balance, are each secured by a Mortgage on
both the borrower's leasehold interest in a portion of the related Mortgaged
Property and the borrower's fee simple interest in the remainder of the related
Mortgaged Property. Leasehold mortgage loans are subject to certain risks not
associated
S-16
<PAGE>
with mortgage loans secured by a lien on the fee estate of the borrower. The
most significant of these risks is that if the borrower's leasehold were to be
terminated upon a lease default, the leasehold mortgagee would lose its
security. However, in each of these cases, the related ground lease requires
the lessor to give the leasehold mortgagee notice of lessee defaults and an
opportunity to cure them, permits the leasehold estate to be assigned to and by
the leasehold mortgagee or the purchaser at a foreclosure sale, and contains
certain other protective provisions typically included in a "mortgageable"
ground lease.
Liquor License Considerations. _______ Mortgage Loans, representing
_____% of the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date are secured by hotel properties. The liquor licenses for some of
such properties may be held by the property manager rather than by the related
Mortgagor. The applicable laws and regulations relating to such licenses
generally prohibit the transfer of such licenses to any person. In the event of
a foreclosure of a hotel property it is unlikely that the Trustee (or Special
Servicer) or purchaser in any such sale would be entitled to the rights under
the liquor license for such hotel property and such party would be required to
apply in its own right for such license.
Special Servicer Actions. In connection with the servicing of
Specially Serviced Mortgage Loans, the Special Servicer may take actions with
respect to such Mortgage Loans that could adversely affect the holders of some
or all of the classes of Offered Certificates. As described herein under
"Servicing -- Responsibilities of Special Servicer," the actions of the Special
Servicer will be subject to review and may be rejected by a representative of
the holders of the Monitoring Certificates (as defined herein), who may have
interests in conflict with those of the holders of the other classes of
Certificates. As a result, it is possible that such representative may cause
the Special Servicer to take actions which conflict with the interests of
certain classes of Certificates.
Servicer May Purchase Certificates. The Special Servicer may
purchase, either directly or through an affiliate, a portion of the Class NR
Certificates. Such a purchase by the Special Servicer could cause a conflict
between the Special Servicer's duties pursuant to the Pooling and Servicing
Agreement and the Special Servicer's interest as a holder of a Certificate. The
Pooling and Servicing Agreement provides that each Servicer shall administer
the Mortgage Loans in accordance with the servicing standard set forth therein
without regard to ownership of any Certificate by such Servicer or any
affiliate of such Servicer.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Trust Fund will consist primarily of a pool of [fixed]
[floating] rate Mortgage Loans with an aggregate principal balance as of the
Cut-off Date, after deducting payments of principal due on such date, of
approximately $_____________. Each Mortgage Loan is evidenced by a promissory
note (a "Mortgage Note") and secured by a mortgage, deed of trust or other
similar security instrument (a "Mortgage") creating a first lien on a fee
simple or leasehold interest in a multifamily, retail, hotel, office,
industrial, or other commercial property (a "Mortgaged Property"). All of the
Mortgage Loans are nonrecourse loans. Therefore, in the event of a Mortgagor
default, recourse may be had only against the specific property and such
limited other assets as have been pledged to secure a Mortgage Loan, and not
against the Mortgagor's other assets. Except as otherwise indicated all
percentages of the Mortgage Loans described herein are approximate percentages
by aggregate principal balance as of the Cut-off Date.
Of the Mortgage Loans to be included in the Trust Fund _____% were
originated by ___, ______% by __________________, a ________________, ______%
by __________________, a ________________, and ___________% by ____________, a
______________. The originators of the Mortgage Loans are referred to herein as
the "Originators". The Depositor will acquire the Mortgage Loans from ____ on
or before the Delivery Date. The Depositor will cause the Mortgage Loans in the
Mortgage Pool to be assigned to the Trustee pursuant to the Pooling and
Servicing Agreement. ___ will be the Master Servicer and ____ will be the
Special Servicer with respect to all the Mortgage Loans. The Master Servicer
and the Special Servicer will service the Mortgage Loans pursuant to the
Pooling and Servicing Agreement.
S-17
<PAGE>
REPRESENTATIONS AND WARRANTIES
Under a loan sale agreement (the "Loan Sale Agreement"), ___ will
make certain representations and warranties to the Depositor. Pursuant to the
terms of the Loan Sale Agreement, ____ will be obligated to cure any breach of
such representations and warranties or to repurchase any Mortgage Loan from the
Depositor as to which there exists a breach of any such representation or
warranty that materially and adversely affects the interests of the
Certificateholders in such Mortgage Loan. ____ shall covenant with the
Depositor to repurchase any Mortgage Loan from the Depositor or cure any such
breach within 90 days of receiving notice thereof. Under the Pooling and
Servicing Agreement, the Depositor will assign its rights under the Loan Sale
Agreement to the Trustee for the benefit of the Certificateholders. The sole
remedy available to the Trustee or the Certificateholders is the obligation of
____ to cure or repurchase any 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 Certificateholders in such Mortgage Loan.
____ has generally represented and warranted as of the Delivery
Date with respect to each Mortgage Loan, among other things, that:
(1) the information set forth in the schedule of the
Mortgage Loans attached to the Loan Sale Agreement is true and correct in all
material respects; (2) _____ owns the Mortgage Loan free and clear of any and
all pledges, liens and/or other encumbrances; (3) no scheduled payment of
principal and interest under the Mortgage Loan was 30 days or more past due as
of the Cut-off Date; (4) the related Mortgage constitutes a valid and, subject
to certain creditors' rights exceptions, enforceable first priority mortgage
lien (subject to certain permitted encumbrances) upon the related Mortgaged
Property; (5) the assignment of the related Mortgage in favor of the Trustee
constitutes a legal, valid and binding assignment; (6) the related assignment
of leases establishes and creates a valid and, subject to certain creditors'
rights exceptions, enforceable first priority lien in the related borrower's
interest in all leases of the Mortgaged Property; (7) the Mortgage has not been
satisfied, canceled, rescinded or subordinated in whole or in material part,
and the related Mortgaged Property has not been released from the lien of such
Mortgage, in whole or in material part; (8) except as set forth in a property
inspection report prepared in connection with the origination of the Mortgage
Loan, the related Mortgaged Property is, to ______'s knowledge, free and clear
of any damage that would materially and adversely affect its value as security
for the Mortgage Loan; (9) to _______'s knowledge, there is no proceeding
pending for the condemnation of all or any material portion of the related
Mortgaged Property; (10) the related Mortgaged Property is covered by an
American Land Title Association (or an equivalent form of) lender's title
insurance policy that insures that the related Mortgage is a valid, first
priority lien on such Mortgaged Property, subject only to the exceptions stated
therein; (11) the proceeds of the Mortgage Loan have been fully disbursed and
there is no obligation for future advances with respect thereto; (12) an
environmental site assessment was performed with respect to the related
Mortgaged Property in connection with the origination of the Mortgage Loan, a
report of each such assessment has been delivered to the Depositor, and there
is not to ____'s knowledge any material and adverse environmental condition or
circumstance affecting such Mortgaged Property that was not disclosed in such
report; (13) each Mortgage Note, Mortgage and other agreement that evidences or
secures the Mortgage Loan is, subject to certain creditors' rights and
exceptions and other exceptions of general application, the legal, valid and
binding obligation of the maker thereof, enforceable in accordance with its
terms; (14) the related Mortgaged Property is, and is required pursuant to the
related Mortgage to be, insured by casualty and liability insurance policies of
a type specified in the related Loan Sale Agreement; (15) there are no
delinquent or unpaid taxes, assessments or other outstanding charges affecting
the related Mortgaged Property that are or may become a lien of priority equal
to or higher than the lien of the related Mortgage; (16) the related borrower
is not, to _______'s knowledge, a debtor in any state or federal bankruptcy or
insolvency proceeding; (17) the related Mortgaged Property consists of the
related borrower's fee simple estate in real estate or, if the related Mortgage
encumbers the interest of the borrower as a lessee under a ground lease of the
Mortgaged Property (a) such ground lease or a memorandum thereof has been or
will be duly recorded and permits the interest of the lessee thereunder to be
encumbered by the related Mortgage; (b) the borrower's interest in such ground
lease is assignable to the Depositor and its successors and assigns upon notice
to, but without the consent of, the lessor thereunder; (c) such ground lease is
in full force and effect and, to the knowledge of _______, no material default
has occurred thereunder; (d) such ground lease, or estoppel letter related
thereto, requires the lessor under such ground lease to give notice of any
default by the lessee to the holder of the Mortgage (provided any required
S-18
<PAGE>
notice of the lien is given to the lessor), and further provides that no notice
of termination given under such ground lease is effective against such holder
unless a copy has been delivered to such holder; (e) the holder of the Mortgage
is permitted a reasonable opportunity (including, where necessary, sufficient
time to gain possession of the interest of the lessee under such ground lease)
to cure any default under such ground lease, which is curable after the receipt
of notice of any such default, before the lessor thereunder may terminate such
ground lease; and (f) such ground lease has an original term (including any
extension options set forth therein) which extends not less than ten years
beyond the scheduled maturity date of the Mortgage Loan; (18) the Mortgage Loan
is not cross-collateralized or cross-defaulted with any loan other than one or
more other Mortgage Loans; (19) the Mortgage does not require the holder
thereof to release all or any material portion of the related Mortgaged
Property from the lien thereof except, upon payment in full of the Mortgage
Loan or, in certain cases, upon (a) the satisfaction of certain legal and
underwriting requirements and (b) (i) except where the portion of the Mortgaged
Property permitted to be released was not considered by _____ in underwriting
the Mortgage Loan, the payment of a release price and prepayment consideration
in connection therewith or (ii) upon a defeasance of the related Mortgage Note
in accordance with the terms thereof; and (20) to _____'s knowledge, there
exists no material default, breach, violation or event of acceleration (and no
event which, with passage of time or the giving of notice, or both, would
constitute any of the foregoing) under the related Mortgage Note or Mortgage in
any such case to the extent the same materially and adversely affects the value
of the Mortgage Loan and the related Mortgaged Property.
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
All of the Mortgage Loans have Due Dates that occur on the first
day of each month. All of the Mortgage Loans are secured by first liens on fee
simple or leasehold interests in the related Mortgaged Properties. As of the
Cut-off Date, the Mortgage Loans had characteristics set forth below. The
totals in the following tables may not add due to rounding.
S-19
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE INTEREST RATES AS OF THE CUT-OFF DATE
Aggregate Principal Percent by Aggregate
Number of Percent by Number Balance as of the Principal Balance
Mortgage Rate Mortgage Loans of Mortgage Loans Cut-off Date as of the Cut-off Date
------------- -------------- ----------------- ------------ ----------------------
<S> <C> <C> <C> <C> <C>
Total
Weighted Average Mortgage Interest Rate: _______%
<CAPTION>
PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
Aggregate Principal Percent by Aggregate
Principal Balance Number of Percent by Number Balance as of the Principal Balance
As of the Cut-Off Date Mortgage Loans of Mortgage Loans Cut-off Date as of the Cut-off Date
---------------------- -------------- ----------------- ------------ ----------------------
<S><C> <C> <C> <C> <C>
Total
Average Principal Balance as of the Cut-off Date: $_____________
ORIGINAL TERM TO MATURITY IN MONTHS
<CAPTION>
Aggregate Principal Percent by Aggregate
Number of Percent by Number Balance as of the Principal Balance
Original Term in Months Mortgage Loans of Mortgage Loans Cut-off Date as of the Cut-off Date
----------------------- -------------- ----------------- ------------ ----------------------
<S> <C> <C> <C> <C> <C>
Total
Weighted Average Original Term to Maturity in Months: ______
REMAINING TERM TO MATURITY IN MONTHS
<CAPTION>
Aggregate Principal Percent by Aggregate
Remaining Term Number of Percent by Number Principal of the Principal Balance
in Months Mortgage Loans of Mortgage Loans Cut-off Date as of the Cut-off Date
----------------- --------------- ----------------- ------------ -----------------------
<S> <C> <C> <C> <C> <C>
Total
Weighted Average Remaining Term to Maturity in Months: _______
S-20
<PAGE>
<CAPTION>
MONTH AND YEAR OF ORIGINATION
Aggregate Principal Percent by Aggregate
Number of Percent by Number Balance as of the Principal Balance
Month/Year Mortgage Loans of Mortgage Loans Cut-off Date as of the Cut-off Date
---------- -------------- ----------------- ------------ ----------------------
<S> <C> <C> <C> <C> <C>
Total
YEAR OF SCHEDULED MATURITY
<CAPTION>
Aggregate Principal Percent by Aggregate
Number of Percent by Number Balance as of the Principal Balance
Year Mortgage Loans of Mortgage Loans Cut-off Date as of the Cut-off Date
---- -------------- ----------------- ------------ ----------------------
<S> <C> <C> <C> <C> <C>
Total
__________ of the Mortgage Loans, representing ______% of the
Mortgage Loans, as a percentage of the aggregate Principal Balance as of the
Cut-off Date, are Balloon Mortgage Loans.
BALLOON MORTGAGE LOANS
ORIGINAL TERM TO MATURITY IN MONTHS
<CAPTION>
Aggregate Principal Percent by Aggregate
Remaining Term Number of Percent by Number Balance as of the Principal Balance
In Months Mortgage Loans of Mortgage Loans Cut-off Date as of the Cut-off Date
--------------- --------------- ------------------- ---------------- --------------------------
<S> <C> <C> <C> <C> <C>
Total
Weighted Average Original Term to Maturity in Months: _____
BALLOON MORTGAGE LOANS
REMAINING TERM TO MATURITY IN MONTHS
<CAPTION>
Aggregate Principal Percent by Aggregate
Remaining Number of Percent by Number Balance as of the Principal Balance
Terms In Months Mortgage Loans of Mortgage Loans Cut-off Date as of the Cut-off Date
------------------ -------------- ------------------ ------------------ --------------------------
<S> <C> <C> <C> <C> <C>
Total
Weighted Average Remaining Term to Maturity in Months: _____
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.
S-21
<PAGE>
<CAPTION>
BALLOON MORTGAGE LOANS
REMAINING AMORTIZATION TERM
Remaining Aggregate Principal Percent by Aggregate
Amortization Number of Percent by Number Balance as of the Principal Balance
Terms in Months Mortgage Loans of Mortgage Loans Cut-off Date as of the Cut-off Date
--------------- ------------------ ----------------- ------------ ----------------------
<S> <C> <C> <C> <C> <C>
Total
</TABLE>
Weighted Average Remaining Amortization Term in Months: _____
The following two tables set forth the range of Cut-off Date LTV
Ratios and Maturity Date LTV Ratios of the 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 a 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 Mortgage Loan. A
"Maturity Date LTV Ratio" is a fraction, expressed as a percentage, the
numerator of which is the principal balance of a 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 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 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 Mortgage Loan. It is
also possible that the market value of a Mortgaged Property securing a Mortgage
Loan may decline between the origination thereof and the related Maturity Date.
An appraisal of each of the Mortgaged Properties was made between
__________ and ______________. It is possible that the market value of a
Mortgaged Property securing a Mortgage Loan has declined since the most recent
appraisal for such Mortgaged Property. All appraisals were obtained by the
related Originator in accordance with the requirements of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989, as amended
("FIRREA").
<TABLE>
<CAPTION>
CUT-OFF DATE LTV RATIOS
Aggregate Principal Percent by Aggregate
Remaining Amortization Number of Percent by Number Balance as of the Principal Balance as
Terms in Months Mortgage Loan of Mortgage Loans Cut-off Date of the Cut-off Date
--------------- --------------- --------------------- --------------- ---------------------
<S> <C> <C> <C> <C> <C>
Total
Weighted Average Cut-off Date LTV Ratio: _________.
<CAPTION>
BALLOON MORTGAGE LOAN
MATURITY DATE LTV RATIOS
Aggregate Principal Percent by Aggregate
Remaining Amortization Number of Percent by Number Balance as of the Principal Balance as
Terms in Months Mortgage Loans of Mortgage Loans Cut-off Date of the Cut-off Date
--------------- ---------------- ------------------ ------------------ --------------------
<S> <C> <C> <C> <C> <C>
Total
</TABLE>
Weighted Average Maturity Date LTV Ratio: _________.
S-22
<PAGE>
The following table sets forth the range of 199__ Debt Service
Coverage Ratios for the Mortgage Loans. The "Debt Service Coverage Ratio" or
"DSCR" for any Mortgage Loan for any period is the ratio of Net Operating
Income produced by the related Mortgaged Property for such period covered by
the operating statement for such period to the amounts of principal and
interest due under such Mortgage Loan for the same period. The DSCRs for 199__
are for periods of 12 months or annualized based upon periods that range from 1
to 11 months. The DSCRs for 199__ and 199__ for each Mortgage Loan as set forth
in Annex A hereto are for the entire fiscal year. Generally, "Net Operating
Income" 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
operating statements for the Mortgaged Properties used in preparing the
following table were obtained from the respective Mortgagors. The information
contained therein was unaudited, and the Depositor has made no attempt to
verify its accuracy. The information derived from these sources was not uniform
among the Mortgage Loans. In some instances, adjustments were made to such
operating statements principally for real estate tax and insurance expenses
resulting in increases or decreases in net operating income stated therein
based upon the Depositor's evaluation that more appropriate information was
available. In addition, obvious capital expenditures were eliminated and
replacement reserve estimates were incorporated for each property based on
____'s standard underwriting ranges considering property age and improvements.
The following ranges were utilized (by property type) in estimating the
replacement reserve: office, $____ to $____ per net rentable square foot;
multifamily (except student housing), $____ to $____ per unit; student housing,
$____ to $____ per unit; retail, $____ to $____ per net rentable square foot;
industrial, $____ to $____ per net rentable square foot; hotel, _% to _% of
gross income; self-storage, $____ to $____ per net rentable square foot; health
care-related, $____ to $____ per bed; and manufactured housing community, $___
to $___ per pad.
<TABLE>
<CAPTION>
199___ DEBT SERVICE COVERAGE RATIOS
Aggregate Principal Percent by Aggregate
Remaining Amortization Number of Percent by Number Balance as of the Principal Balance as
Terms in Months Mortgage Loans of Mortgage Loans Cut-off Date of the Cut-off Date
--------------- ------------------ ----------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C>
Total
</TABLE>
Weighted Average Debt Service Coverage Ratio: _________.
[Information on certain characteristics of certain specific Mortgage Loans to
be provided here.]
The 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:
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
Aggregate Principal Percent by Aggregate
Remaining Amortization Number of Percent by Number Balance as of the Principal Balance as
Terms in Months Mortgage Loans of Mortgage Loans Cut-off Date of the Cut-off Date
--------------- ---------------- ------------------- ------------------- -------------------------
<S> <C> <C> <C> <C> <C>
Total
</TABLE>
S-23
<PAGE>
<TABLE>
<CAPTION>
PROPERTY TYPES
Aggregate Principal Percent by Aggregate
Number of Percent by Number Balance as of Principal Balance as
Type Mortgage Loans of Mortgage Loans the Cut-off Date of the Cut-off Date
---- --------------- ----------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Multi-Family..........................................
Retail -- with anchor tenant(1).......................
Hotel.................................................
Retail -- without anchor tenant(1)
Health Care-Related...................................
Office................................................
Industrial............................................
Manufactured Housing Community........................
Self Storage..........................................
Total.................................................
</TABLE>
(1) For purposes of this table, the properties with an anchor tenant are as
designated in Annex A. The anchor tenant, if any, is set forth in Annex A.
<TABLE>
<CAPTION>
YEARS SINCE THE MORTGAGED PROPERTIES WERE BUILT (1)
Aggregate Principal Percent by Aggregate
Property Age Number of Percent by Number Balance as of the Principal Balance as
In Years Mortgage Loans of Mortgage Loans Cut-off Date of the Cut-off Date
------------- ----------------- --------------------- --------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Total
Weighted Average Property Age in Years: _____
</TABLE>
(1) See Annex A for the date on which the Mortgaged Property most recently
underwent some degree of capital improvements.
<TABLE>
<CAPTION>
PHYSICAL OCCUPANCY PERCENTAGES (1)
MULTIFAMILY AND MANUFACTURED HOUSING COMMUNITIES
Aggregate Principal Percent by Aggregate
Occupancy Number of Percent by Number Balance as of the Principal Balance as
Percentage Mortgage Loans of Mortgage Loans Cut-off Date of the Cut-off Date
--------------- ----------------- ---------------------- ------------------- ------------------------
<S> <C> <C> <C> <C> <C>
Total
Weighted Average Occupancy Percentage: ________%
</TABLE>
(1) See Annex A for dates as of which occupancy percentages were calculated for
each Mortgaged Property.
S-24
<PAGE>
<TABLE>
<CAPTION>
PHYSICAL OCCUPANCY PERCENTAGES (1)
RETAIL
Aggregate Principal Percent by Aggregate
Occupancy Number of Percent by Number Balance as of the Principal Balance as
Percentage Mortgage Loans of Mortgage Loans Cut-off Date of the Cut-off Date
---------- ----------------- ------------------ ------------------- ------------------------
<S> <C> <C> <C> <C> <C>
Total
Weighted Average Occupancy Percentage: __________%
</TABLE>
(1) See Annex A for dates as of which occupancy percentages were calculated for
each Mortgaged Property.
S-25
<PAGE>
<TABLE>
<CAPTION>
PHYSICAL DAILY OCCUPANCY PERCENTAGES (1)
HOTEL
Aggregate Principal Percent by Aggregate
Occupancy Number of Percent by Number Balance as of the Principal Balance as
Percentage Mortgage Loans of Mortgage Loans Cut-off Date of the Cut-off Date
---------- ----------------- ------------------- ------------------- -----------------------
<S> <C> <C> <C> <C> <C>
Total
</TABLE>
Weighted Average Occupancy Percentage: ______%
(1) See Annex A for the period over which occupancy percentages were calculated
for each Mortgaged Property.
<TABLE>
<CAPTION>
PHYSICAL OCCUPANCY PERCENTAGES (1)
OFFICE
Aggregate Principal Percent by Aggregate
Occupancy Number of Percent by Number Balance as of the Principal Balance as
Percentage Mortgage Loans of Mortgage Loans Cut-off Date of the Cut-off Date
----------------- ------------------ ------------------- --------------------- ------------------------
<S> <C> <C> <C> <C> <C>
Total
</TABLE>
Weighted Average Occupancy Percentage: ___________%
(1) See Annex A for dates as of which occupancy percentages were calculated for
each Mortgaged Property.
<TABLE>
<CAPTION>
PHYSICAL OCCUPANCY PERCENTAGES (1)
OTHER
Aggregate Principal Percent by Aggregate
Occupancy Number of Percent by Number Balance as of the Principal Balance as
Percentage Mortgage Loans of Mortgage Loans Cut-off Date of the Cut-off Date
---------------- ------------------ ----------------- -------------------- -----------------------
<S> <C> <C> <C> <C> <C>
Total
</TABLE>
Weighted Average Occupancy Percentage: ___________%
(1) See Annex A for dates as of which occupancy percentages were calculated for
each Mortgaged Property.
With certain limited exceptions relating to casualty and
condemnation proceeds, or other prepayments beyond the borrower's control, all
of the Mortgage Loans prohibit the prepayment thereof until a date specified in
the related Mortgage Note (such period, the "Lock-Out Period" and the date of
expiration thereof, the "Lock-Out Date") and/or provide that upon any voluntary
principal prepayment of a Mortgage Loan, the related Mortgagor will be required
to pay a prepayment premium or yield maintenance penalty (a "Prepayment
Premium"). The following table sets forth the percentage of the declining
aggregate balance of all the Mortgage Loans that on June 1 of each of the years
indicated will be within their related Lock-out Period and/or in which a
principal prepayment must be accompanied by a Prepayment Premium.
S-26
<PAGE>
<TABLE>
<CAPTION>
PREPAYMENT LOCK-OUT/PREPAYMENT PREMIUM ANALYSIS
PERCENTAGE OF MORTGAGE LOANS BY OUTSTANDING PRINCIPAL BALANCE
AS OF THE DATE INDICATED ASSUMING NO PREPAYMENTS
CURRENT JUNE JUNE JUNE JUNE JUNE JUNE JUNE JUNE JUNE JUNE
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LOCK-OUT......................
Prepayment Premium
Yield Maintenance (1).........
7.00 - 7.99% (2) ..........
6.00 - 6.99% (2) ..........
5.00 - 5.99% (2) ..........
4.00 - 4.99% (2) ..........
3.00 - 3.99% (2) ..........
2.00 - 1.99% (2) ..........
1.00 - 1.99% (2) ..........
No Prepayment Premium
Total......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Aggregate Principal
Balance of the
Mortgage Loans (3).........
Percentage of Cut-Off
Date Principal
Balance of the Mortgage
Loans
Outstanding................ 100.0%
</TABLE>
(1) The Mortgage Loans generally require the payment of a Prepayment Premium
in connection with any principal prepayment, in whole or in part until
90-180 days prior to maturity. Any Prepayment Premium will equal the
present value, as of the date of prepayment, of the remaining Monthly
Payments from such date of prepayment through the related stated maturity
(including the Balloon Payment), determined by discounting such payments
at a U.S. Treasury rate specified therein, minus the then outstanding
balance, subject to a minimum Prepayment Premium equal to 1% of the
principal balance of such Mortgage Loan being prepaid.
(2) Mortgage Loan requires a Prepayment Premium equal to indicated percentage
of amount prepaid.
(3) Millions of dollars.
S-27
<PAGE>
RELATED BORROWERS AND OTHER ISSUES
[Description of certain borrowers and issues.]
See Annex A for additional information on the Mortgage Loans.
ESCROWS
All of the Mortgage Loans except for _______ Mortgage Loans,
representing ______% of the Mortgage Loans, provide for monthly escrows to
cover property taxes on the Mortgaged Properties. Monthly escrows to cover
insurance premiums on the Mortgaged Properties are generally not required.
___________ of the Mortgage Loans, which represent _______% of the
Mortgage Loans also require monthly escrows to cover ongoing replacements and
capital repairs.
_________ of the Mortgage Loans, which represent __________% of the
Mortgage Loans, also required upfront or monthly escrows for the full term or a
portion of the term of the related Mortgage Loan to cover anticipated releasing
costs, including tenant improvements and leasing commissions.
See Annex A for additional information on the monthly escrows on
the Mortgage Loans.
UNDERWRITING GUIDELINES
Loan underwriting guidelines and procedures utilized by
a loan originator are intended to assess the value of the related property, the
ability of such property (as operated and managed by the proposed borrower or
its agents) to generate operating income and the experience of the proposed
borrowers. In focusing primarily on the income-generating capabilities of the
property, the underwriting guidelines include but are not limited to such
factors as: the current actual cash flow; the location of the property;
comparable properties in the relevant market; the type and length of leases (if
applicable to the property type); the management ability of the borrower,
including its business experience and property management capabilities and
financial soundness; and other economic, demographic or other factors as in the
judgment of the originator might affect the income generated by the property or
the value of the property.
ADDITIONAL INFORMATION
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Offered Certificates and will be filed, together with the
Pooling and Servicing Agreement, with the Securities and Exchange Commission
within fifteen days after the initial issuance of the Offered Certificates.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and
Servicing Agreement and will include the following nine classes of Offered
Certificates designated as the Class A1, Class A1X, Class A2, Class A2X, Class
B, Class C, Class BCX, Class D and Class E Certificates. In addition to the
Offered Certificates, the Certificates will also include the Class F, Class G,
Class NR, Class R-I, Class R-II and Class R-III Certificates. Only the Offered
Certificates are offered hereby. The Certificates represent in the aggregate
the entire beneficial ownership interest in a Trust Fund consisting of: (i) a
pool of fixed rate Mortgage Loans and all payments under and proceeds of the
Mortgage Loans received after the Cut-off Date (exclusive of payments of
principal and interest due on or before the Cut-off Date); (ii) any Mortgaged
Property acquired on behalf of the Trust Fund through foreclosure or deed in
lieu of foreclosure (upon acquisition, an "REO Property"); (iii) such funds or
assets as from time to time are deposited in the Collection or Distribution
Accounts or any account established in connection with REO Properties
S-28
<PAGE>
(the "REO Account"); and (iv) the rights of the mortgagee under all insurance
policies with respect to the Mortgage Loans.
The Class A1, Class A1X, Class A2 and Class A2X Certificates will
evidence approximately an initial ___% undivided interest in the Trust Fund.
The Class B Certificates will evidence approximately an initial __% undivided
interest in the Trust Fund. The Class C Certificates will evidence
approximately an initial ___% undivided interest in the Trust Fund. The Class D
Certificates will evidence approximately an initial ____% undivided interest in
the Trust Fund. The Class E Certificates will evidence approximately an initial
___% undivided interest in the Trust Fund.
The Class BCX Certificates consist of the following components:
Class BCX component B and Class BCX component C. The Class BCX component B and
Class BCX component C are not separately transferrable.
The Offered Certificates (the "DTC Registered Certificates") will
be issued, maintained and transferred on the book-entry records of The
Depository Trust Company ("DTC") and its Participants (as defined in the
Prospectus). The DTC Registered Certificates, other than the Interest Only
Certificates, will be issued in minimum denominations of $__________ and
integral multiples of $____ in excess thereof. The Interest Only Certificates
will be issued in denominations of $100,000 Notional Amount and integral
multiples of $_____ Notional Amount.
The DTC Registered Certificates will be represented by one or more
certificates registered in the name of the nominee of DTC. The Company has been
informed by DTC that DTC's nominee will be Cede & Co. ("Cede"). No person
acquiring an interest in the DTC Registered Certificates (a "Beneficial Owner")
will be entitled to receive a certificate representing such person's interest
(a "Definitive Certificate"), except as set forth below under "--Book-Entry
Registration of Certain of the Senior Certificates -- Definitive Certificates."
Unless and until Definitive Certificates are issued for the DTC Registered
Certificates under the limited circumstances described herein, all references
to actions by Certificateholders with respect to the DTC Registered
Certificates shall refer to actions taken by DTC upon instructions from its
Participants, and all references herein to distributions, notices, reports and
statements to Certificateholders with respect to the DTC Registered
Certificates shall refer to distributions, notices, reports and statements to
DTC or Cede, as the registered holder of the DTC Registered Certificates, for
distribution to Beneficial Owners by DTC in accordance with DTC procedures.
BOOK-ENTRY REGISTRATION OF THE OFFERED CERTIFICATES
General. Beneficial Owners that are not Participants or
Intermediaries (as defined in the Prospectus) but desire to purchase, sell or
otherwise transfer ownership of, or other interests in, the related DTC
Registered Certificates may do so only through Participants and Intermediaries.
In addition, Beneficial Owners will receive all distributions of principal of
and interest on the related DTC Registered Certificates from the Trustee
through DTC and Participants. Accordingly, Beneficial Owners may experience
delays in their receipt of payments. Unless and until Definitive Certificates
are issued for the related DTC Registered Certificates, it is anticipated that
the only registered Certificateholder of such DTC Registered Certificates will
be Cede, as nominee of DTC. Beneficial Owners will not be recognized by the
Trustee or the Master Servicer as Certificateholders, as such term is used in
the Pooling and Servicing Agreement; provided, however, that Beneficial Owners
will be permitted to request and receive information furnished to
Certificateholders by the Trustee subject to receipt by the Trustee of a
certification in form and substance acceptable to the Trustee stating that the
person requesting such information is a Beneficial Owner. Otherwise, the
Beneficial Owners will be permitted to receive information furnished to
Certificateholders and to exercise the rights of Certificateholders only
indirectly through DTC, its Participants and Intermediaries.
Under the rules, regulations and procedures creating and affecting
DTC and its operations (the "Rules"), DTC is required to make book-entry
transfers of DTC Registered Certificates among Participants and to receive and
transmit distributions of principal of, and interest on, such DTC Registered
Certificates. Participants and Intermediaries with which Beneficial Owners have
accounts with respect to such DTC Registered Certificates similarly are
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Beneficial Owners. Accordingly,
although Beneficial Owners will not possess physical certificates
S-29
<PAGE>
evidencing their interests in the DTC Registered Certificates, the Rules
provide a mechanism by which Beneficial Owners, through their Participants and
Intermediaries, will receive distributions and will be able to transfer their
interests in the DTC Registered Certificates.
None of the Depositor or the Trustee will have any liability for
any actions taken by DTC or its nominee, including, without limitation, actions
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the DTC Registered Certificates held by Cede,
as nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
Definitive Certificates. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"Description of the Certificates -- Book-Entry Registration and Definitive
Certificates."
Upon the occurrence of an event described in the Prospectus in the
seventh paragraph under "Description of the Certificates -- Book-Entry
Registration and Definitive Certificates," the Trustee is required to notify,
through DTC, Participants who have ownership of DTC Registered Certificates as
indicated on the records of DTC of the availability of Definitive Certificates
for their DTC Registered Certificates. Upon surrender by DTC of the definitive
certificates representing the DTC Registered Certificates and upon receipt of
instructions from DTC for re-registration, the Trustee will reissue the DTC
Registered Certificates as Definitive Certificates issued in the respective
principal amounts owned by individual Beneficial Owners, and thereafter the
Trustee and the Master Servicer will recognize the holders of such Definitive
Certificates as Certificateholders under the Pooling and Servicing Agreement.
For additional information regarding DTC and the DTC Registered
Certificates, see "Description of the Certificates -- Book-Entry Registration
and Definitive Certificates" in the Prospectus.
DISTRIBUTIONS
Method, Timing and Amount. Distributions on the Certificates will
be made on the _________ day of each month or, if such __________ day is not a
business day, then on the next succeeding business day, commencing in ________
199__ (each, a "Distribution Date"). All distributions (other than the final
distribution on any Certificate) will be made by the Trustee to the persons in
whose names the Certificates are registered at the close of business on each
Record Date, which will be the last business day of the month preceding the
month in which the related Distribution Date occurs. Such distributions will be
made by wire transfer in immediately available funds to the account specified
by the Certificateholder at a bank or other entity having appropriate
facilities therefor, if such Certificateholder will have provided the Trustee
with wiring instructions as provided in the Pooling and Servicing Agreement and
is the registered holder of Certificates with an initial aggregate denomination
of at least $__________ or, otherwise, by check. The final distribution on any
Certificate will be made in like manner, but only upon presentment or surrender
of such Certificate at the location specified in the notice to the holder
thereof of such final distribution. All distributions made with respect to a
class of Certificates on each Distribution Date will be allocated pro rata
among the outstanding Certificates of such class based on their respective
Percentage Interests. The "Percentage Interest" evidenced by any Certificate is
equal to the initial denomination thereof as of the Delivery Date, divided by
the initial Class Balance or Notional Amount, as applicable, for such class.
The aggregate distribution to be made on the Certificates on any Distribution
Date shall equal the Available Distribution Amount.
The "Available Distribution Amount" for any Distribution Date is an
amount equal to (a) the sum of (i) the amount on deposit in the Collection
Account (as defined herein) as of the close of business on the related
Determination Date, which amount will include scheduled payments on the
Mortgage Loans due on or prior to the related Due Date immediately preceding,
and collected as of, such Determination Date (to the extent not distributed on
previous Distribution Dates) and unscheduled payments and other collections on
the Mortgage Loans collected during the related Remittance Period and (ii) the
aggregate amount of any P&I Advances made by each Servicer in respect of such
Distribution Date (not otherwise included in clause (i) above) net of (b) the
portion of the amount described in clause (a)(i) hereof that represents (i)
Monthly Payments due on a Due Date subsequent to the end of
S-30
<PAGE>
the related Remittance Period, (ii) any amounts payable or reimbursable
therefrom to any Servicer or the Trustee or (iii) any servicing and trustee
compensation.
Pass-Through Rate on the Certificates. the "Pass-Through Rates" on
the Class A1 and Class A2 Certificates are fixed and are set forth on the cover
hereof. The Pass-Through Rates on the Class A1X, Class A2X, Class B and Class C
Certificates will be equal to the weighted average of the Remittance Rates in
effect from time to time on the Mortgage Loans minus the Pass-Through Rates on
the Class A1 and Class A2 Certificates, respectively. The Class BCX
Certificates will be entitled to interest at the Pass-Through Rate on the
components. The Pass-Through Rate on the Class BCX component B is _______% per
annum and on the Class BCX component C is _______% per annum. The Pass-Through
Rates on the Class D and Class E Certificates will be equal to the weighted
average of the Remittance Rates in effect from time to time on the Mortgage
Loans. The "Remittance Rate" for any Mortgage Loan is equal to the excess of
the Mortgage Interest Rate thereon (without giving effect to any modification
or other reduction thereof following the Cut-off Date) over the sum of the
applicable Servicing Fee Rate and the fee payable to the Trustee. The fee
payable to the Trustee will be _______% per annum. The Mortgage Interest Rate
for each of the Mortgage Loans which provide for the computation of interest
other than on the basis of a 360-day year consisting of twelve 30-day Months (a
"30/360 Basis") (that is the basis on which interest on the Certificates
accrues) will be adjusted to reflect that difference.
Interest Distributions on the Certificates. Subject to the
distribution of the Principal Distribution Amount to the Holders of classes of
Certificates of a higher priority, as described under "Priority of
Distributions" below, Holders of each class of Certificates will be entitled to
receive on each Distribution Date, to the extent of the Available Distribution
Amount for such Distribution Date (net of any interest accrued on any
Collateral Value Adjustment subsequently recovered and any Net Prepayment
Premium) (the "Adjusted Available Distribution Amount"), distributions
allocable to interest in an amount (the "Interest Distribution Amount") equal
to the sum of interest accrued during the period from and including the first
day of the month preceding the month of the Distribution Date) (or from the
Cut-off Date in the case of the initial Distribution Date) to and including the
last day of the month preceding the month of the Distribution Date (calculated
on the basis of a 360-day year consisting of twelve 30-day months) on the Class
Balance (or the Notional Amount, in the case of the Interest Only Certificates,
or the related components) of such class of Certificates or such components, as
the case may be, outstanding immediately prior to such Distribution Date, at
the then-applicable Pass-Through Rate (the "Interest Accrual Amount") less such
class' (or component's) pro rata share, by Interest Accrual Amount, of any
interest shortfall not related to a Mortgagor delinquency or default, such as
Prepayment Interest Shortfalls (as defined herein) and shortfalls associated
with exemptions provided by the Relief Act (as defined in the Prospectus). The
Notional Amount of the Class A1X Certificates will equal the Class Balance of
the Class A1 Certificates. The Notional Amount of the Class A2X Certificates
will equal the Class Balance of the Class A2 Certificates. The Notional Amount
of the Class BCX component B Certificates will equal the Class Balance of the
Class B Certificates. The Notional Amount of the Class BCX component C
Certificates will equal the Class Balance of the Class C Certificates. A
Notional Amount does not entitle the Interest Only Certificates (or any
component thereof) to any distributions of principal. If the Adjusted Available
Distribution Amount for any Distribution Date is less than the Interest
Distribution Amount for such Distribution Date, the shortfall will be part of
the Interest Distribution Amount distributable to holders of Certificates
affected by such shortfall on subsequent Distribution Dates, to the extent of
available funds. Any such shortfall will bear interest at the related
Pass-Through Rate.
To the extent not necessary to reimburse the Master Servicer for
reductions in its compensation to cover Prepayment Interest Shortfalls, in
addition to the related Interest Distribution Amount, the Interest Only
Certificates will receive _____%, and the remaining Offered Certificates will
receive ____%, of any Net Prepayment Premium paid with respect to the Mortgage
Loans. The Net Prepayment Premium payable to the Interest Only Certificates
will be paid to the holders of the Class A1X Certificates while the Class A1
Certificates are outstanding. On each Distribution Date after the Distribution
Date on which the Class Balances of the Class A1 Certificates has been reduced
to zero, any Net Prepayment Premium payable to the Interest Only Certificates
will be paid to the holders of the Class A2X Certificates while the Class A2
Certificates are outstanding. On each Distribution Date after the Distribution
Date on which the Class Balances of the Class A1 and Class A2 Certificates have
been reduced to zero, any Net Prepayment Premium payable to the Interest Only
Certificates will be paid to the holders of the Class BCX
S-31
<PAGE>
Certificates while the Class B or Class C Certificates are outstanding. No
portion of the Net Prepayment Premium will be payable to the Interest Only
Certificates after the Distribution Date on which the Class Balances of the
Class A1, Class A2, Class B and Class C Certificates have been reduced to zero.
On each Distribution Date, the Net Prepayment Premium not payable to the Master
Servicer or the holders of the Interest Only Certificates will be paid the
holders of the class of Offered Certificates then outstanding with the highest
principal payment priority.
To the extent any Mortgage Loan is prepaid in full or in part
between a Determination Date and the related Due Date immediately following
such Determination Date, an interest shortfall may result on the second
Distribution Date following such Determination Date because interest on
prepayments in full or in part will only accrue to the date of payment (such
shortfall, a "Prepayment Interest Shortfall"). To the extent any Mortgage Loan
is prepaid in full or in part between the related Due Date and the
Determination Date immediately following such Due Date, the interest on such
prepayment will be included in the Available Distribution Amount for the
immediately succeeding Distribution Date (the "Prepayment Interest Excess"). If
a Mortgage Loan is prepaid in full or in part during any Remittance Period, any
related Prepayment Interest Shortfall shall be offset to the extent of any
Prepayment Interest Excess and any Prepayment Premium collected during such
Remittance Period. If the Prepayment Interest Shortfall for any Remittance
Period exceeds any Prepayment Interest Excess and any Prepayment Premiums
collected during such period, such shortfall shall only be offset by an amount
up to the portion of the Servicing Fee payable to the Master Servicer on the
related Distribution Date. To the extent that any such shortfall shall have
been offset by a portion of the Servicing Fee, the Master Servicer shall be
entitled to any excess of the Prepayment Interest Excess and Prepayment
Premiums over the Prepayment Interest Shortfall for any subsequent period.
The "Net Prepayment Premium" with respect to any Distribution Date
will equal the excess of (a) the total amount of Prepayment Premiums received
during the related Remittance Period over (b) the Prepayment Interest Shortfall
for any Remittance Period over the Prepayment Interest Excess for any
Remittance Period.
The Pass-Through Rates on the Certificates with variable
Pass-Through Rates will not be affected by the deferral of interest or
reduction of the Mortgage Interest Rate on any Mortgage Loan by the Special
Servicer or by the occurrence of either such event in connection with any
bankruptcy proceeding involving the related borrower. The amount of any
resulting interest shortfall will be allocated to the Certificates, in the
order described under "Subordination" below.
Principal Distributions on the Offered Certificates. Holders of the
Certificates will be entitled to receive on each Distribution Date in reduction
of the related Class Balance in the order described herein until the related
Class Balance is reduced to zero, to the extent of the balance of the Adjusted
Available Distribution Amount remaining after the payment of the Interest
Distribution Amount for such Distribution Date for the classes of Certificates
with the highest priority for interest payments (as described under "Priority
of Distributions" below), distributions in respect of principal in an amount
(the "Principal Distribution Amount") equal to the aggregate of (i) all
scheduled payments of principal (other than Balloon Payments) due on the
Mortgage Loans on the related Due Date whether or not received and all
scheduled Balloon Payments received, (ii) if the scheduled Balloon Payment is
not received, with respect to any Balloon Mortgage Loans on and after the
Maturity Date thereof, the principal payment that would need to be received in
the related month in order to fully amortize such Balloon Mortgage Loan with
level monthly payments by the end of the term used to derive scheduled payments
of principal due prior to the related Maturity Date, (iii) to the extent not
previously advanced any unscheduled principal recoveries received during the
related Remittance Period in respect of the Mortgage Loans, whether in the form
of liquidation proceeds, insurance proceeds, condemnation proceeds or amounts
received as a result of the purchase of any Mortgage Loan out of the Trust Fund
and (iv) any other portion of the Adjusted Available Distribution Amount
remaining undistributed after payment of any interest payable on the
Certificates for the related or any prior Distribution Date, including any
Prepayment Interest Excess not offset by any Prepayment Interest Shortfall
occurring during the related Remittance Period or otherwise required to
reimburse the Master Servicer, as described herein, and interest distributions
on the Mortgage Loans, in excess of interest distributions on the Certificates,
resulting from the allocation of amounts described in this clause (iv) to
principal distributions on the Certificates. The Interest Only Certificates do
not have a Class Balance and are therefore not entitled to any principal
distributions.
S-32
<PAGE>
PRIORITY OF DISTRIBUTIONS
The Adjusted Available Distribution Amount for each Distribution
Date will be applied (a) first to distributions of interest on the classes of
Certificates outstanding with the highest priority for interest payment (as
described below), (b) second to distributions of the Principal Distribution
Amount to the classes of Certificates then entitled to distribution of
principal as described below, and (c) third, to distributions of interest on
each class of Certificates other than the classes described in clause (a),
above, in the order of priority described below; provided that on any
Distribution Date on which the Class Balance of a class of Certificates is
reduced to zero pursuant to clause (b) above, interest distributions pursuant
to clause (a) above will be made to the class of Certificates outstanding with
the next highest priority for interest payments prior to making distributions
of the Principal Distribution Amount thereto pursuant to clause (b) above. The
priority for interest payments for purposes of clauses (a) and (c), above, is:
first to distributions of interest on the Class A1, Class A1X, Class A2 and
Class A2X Certificates, pro rata, based on their respective Interest Accrual
Amounts; second to distributions of interest on the Class B and Class BCX
component B Certificates, pro rata, based on their respective Interest Accrual
Amounts; third to distributions of interest on the Class C and Class BCX
component C Certificates, pro rata, based on their respective Interest Accrual
Amounts; fourth to distributions of interest on the Class D Certificates; fifth
to distributions of interest on the Class E Certificates; and then to the
remaining classes of Certificates up to their respective Interest Accrual
Amounts, all as described under "--Distributions -- Interest Distributions on
the Certificates" above. The Principal Distribution Amount for such
Distribution Date will be applied to distributions of principal of the Class
A1, Class A2, Class B, Class C, Class D and Class E Certificates, in that
order, and then to distributions of principal of the Other Classes of
Certificates until their respective Class Balances have been reduced to zero.
OTHER CERTIFICATES
The Class F, Class G, Class NR, Class R-I, Class R-II and Class
R-III Certificates are not offered hereby. The Pass-Through Rates on the Class
F, Class G and Class NR Certificates will equal the weighted average of the
Remittance Rates in effect from time to time on the Mortgage Loans. The Class
Balances on the Class F, Class G and Class NR Certificates will equal
$___________, $___________, and $___________, respectively, and approximately
$_____________, in the aggregate. The Class R-I, Class R-II and Class R-III
Certificates will not have a Pass-Through Rate or a Class Balance.
SUBORDINATION
Neither the Offered Certificates nor the Mortgage Loans are insured
or guaranteed against losses suffered on the Mortgage Loans by any government
agency or instrumentality or by the Depositor, the Trustee, the Master
Servicer, the Special Servicer or any affiliate thereof.
In addition to the payment priorities described under "--Priority
of Distributions" above, certain Certificates will be subordinated to other
Certificates with respect to the allocation of Realized Losses. Realized Losses
on the Mortgage Loans will be allocated, first, to the Other Certificates,
second, to the Class E Certificates, third, to the Class D Certificates,
fourth, to the Class C Certificates, fifth, to the Class B Certificates, in
each case until the related Class Balance is reduced to zero; and thereafter,
to the Class A1 and Class A2 Certificates. The Class Balance of a class of
Certificates will be reduced by the principal portion of any Realized Losses
allocated to such class.
In addition to Realized Losses, shortfalls will also occur as a
result of each Servicer's right to receive payments of interest with respect to
unreimbursed advances, the Special Servicer's right to compensation with
respect to Mortgage Loans which are or have been Specially Serviced Mortgage
Loans and as a result of other Trust Fund expenses. Such shortfalls will be
allocated as described above to the classes of Certificates with the lowest
payment priority for purposes of the application of Available Distribution
Amount in the order described herein.
S-33
<PAGE>
Within 30 days after the earliest to occur of (i) 90 days after the
date on which an uncured delinquency occurs in respect of a Mortgage Loan, (ii)
60 days after the date on which a receiver is appointed (if such appointment
remains in effect during such 60-day period) in respect of a Mortgaged
Property, (iii) as soon as reasonably practical after the date on which a
Mortgaged Property becomes an REO Property or (iv) the date on which a change
in the payment rate, Mortgage Interest Rate, principal balance, amortization
terms or Maturity Date of any Specially Serviced Mortgage Loan becomes
effective, an appraisal will be obtained by the Special Servicer from an
independent MAI appraiser at the expense of the Trust Fund (except if an
appraisal has been conducted within the 12 month period preceding such event).
As a result of such appraisal, a Collateral Value Adjustment may result, which
Collateral Value Adjustment will be allocated, for purposes of determining
distributions of interest to the Certificates, in the manner and priority
described above with respect to Realized Losses. Notwithstanding the foregoing,
a Collateral Value Adjustment will be zero with respect to such a Mortgage Loan
if (i) the event giving rise to such Collateral Value Adjustment is the
extension of the maturity of such Mortgage Loan, (ii) the payments on such
Mortgage Loan were not delinquent during the twelve month period immediately
preceding such extension and (iii) the payments on such Mortgage Loan are then
current, provided, that if at any later date there occurs a delinquency in
payment with respect to such Mortgage Loan, the Collateral Value Adjustment
will be recalculated and applied to the same extent as it would have been
previously applied. In addition, in any case, upon the occurrence of any event
giving rise to a subsequent Collateral Value Adjustment (including the
delinquency referred to in the immediately preceding sentence) more than twelve
months after an appraisal was obtained with respect to a Collateral Value
Adjustment, the Special Servicer will order a new appraisal as described above,
within 30 days of the occurrence of any such event giving rise to a subsequent
Collateral Value Adjustment and will adjust the amount of the Collateral Value
Adjustment in accordance therewith.
The "Collateral Value Adjustment" for any Distribution Date with
respect to any Mortgage Loan will be an amount equal to the excess of (a) the
principal balance of such Mortgage Loan over (b) the excess of (i) 90% of the
current appraised value of the related Mortgaged Property as determined by an
independent MAI appraisal of such Mortgaged Property over (ii) the sum of (A)
to the extent not previously advanced by a Servicer, all unpaid interest on
such Mortgage Loan at a per annum rate equal to the Mortgage Interest Rate, (B)
all unreimbursed Advances and interest thereon, and (C) any unpaid Servicing
and Trustee fees and (D) all currently due and delinquent real estate taxes and
assessments, insurance premiums and, if applicable, ground rents in respect of
such Mortgaged Property (net of any amount escrowed or otherwise available for
payment of the amount due on such Mortgage Loan). The excess of the principal
balance of any Mortgage Loan over the related Collateral Value Adjustment is
referred to herein as the "Adjusted Collateral Value". A Collateral Value
Adjustment shall result in a reduction of the Class Balance (or Notional
Amount) of any class of Certificates solely for the purposes specified herein
and shall not be a permanent reduction of the Class Balance (or Notional
Amount) of any class of Certificates prior to the occurrence of a Realized
Loss.
A "Realized Loss", in the case of any Mortgage Loan described in
clause (a) or clause (b) of the succeeding sentence, is equal to the sum of (a)
the Stated Principal Balance of any Loss Mortgage Loan, (b) interest thereon
not previously distributed to Certificateholders through the last day of the
month in which such Mortgage Loan became a Loss Mortgage Loan, (c) any advances
made by any Servicer which remain unreimbursed and (d) any interest accrued on
such advances (see "--Advances" below) as of such time, reduced by any amounts
recovered thereon as of such time and, in the case of any Mortgage Loan
described in clause (c) of the succeeding sentence, is the amount determined to
have been permanently forgiven as described in such clause (c). A "Loss
Mortgage Loan" is any Mortgage Loan (a) which is finally liquidated, (b) with
respect to which the Master Servicer or the Special Servicer has determined
that an advance which has been made or would otherwise be required to be made,
is not, or, if made, would not be, recoverable out of proceeds on such Mortgage
Loan or (c) with respect to which a portion of the principal balance thereof
has been permanently forgiven whether pursuant to a modification or a valuation
resulting from a proceeding initiated under the Bankruptcy Code. The "Stated
Principal Balance" of any Mortgage Loan as of any date of determination is the
principal balance as of the Cut-off Date minus the sum of (i) the principal
portion of each Monthly Payment due on such Mortgage Loan after the Cut-off
Date, to the extent received from the Mortgagor or advanced and distributed to
Certificateholders, and (ii) any unscheduled amounts of principal received with
respect to such Mortgage Loans, to the extent distributed to
Certificateholders.
S-34
<PAGE>
To the extent any amount on a Mortgage Loan with respect to which a
Collateral Value Adjustment was required is recovered in excess of the Adjusted
Collateral Value (after giving effect to all other amounts previously collected
with respect thereto), such amount will be distributed to each holder of a
class of Certificates to which a Collateral Value Adjustment has been
allocated, in the order of payment described hereinabove up to an amount equal
to interest accrued on the sum of any Collateral Value Adjustment allocated to
such class of Certificates (or component) in reduction of the Class Balance (or
Notional Amount) thereof at the Pass-Through Rate in effect during such
applicable Collection Period from the date of such allocation to the end of the
Collection Period in which such an amount is recovered. The Class Balance (or
Notional Amount) of each such class (or component) shall be increased by the
amount of such excess over such interest payment in the order of payment
described hereinabove. Any reduction of the Class Balance (or Notional Amount)
of a class (or component) of Certificates following a Collateral Value
Adjustment and any increase thereof following an excess recovery will affect
the Percentage Interest and the calculation of any interest or voting right of
such class of Certificates.
ADVANCES
On the business day immediately preceding each Distribution Date,
the Master Servicer will be obligated to make advances out of its own funds or
funds held in the Collection Account (as defined herein) that are not required
to be part of the Available Distribution Amount for such Distribution Date or
to remit any advances made by the Special Servicer ("P&I Advances"), in an
amount equal to the excess of all Monthly Payments (net of the Servicing Fee)
due over the amount actually received, subject to the limitations described
herein. In addition, each Servicer will be required to advance certain property
related expenses. The Servicers generally may not advance any amounts, other
than P&I Advances, unless such advance is contemplated in the related Asset
Strategy Report (as defined herein) for the related Mortgage Loan or such
advance is for one of several purposes specified in the Pooling and Servicing
Agreement as "Property Protection Expenses". All such advances will be
reimbursable to the related Servicer from late payments, insurance proceeds,
liquidation proceeds, condemnation proceeds or amounts paid in connection with
the purchase of such Mortgage Loan or, as to any such advance that is deemed
not otherwise recoverable, from any amounts on deposit in the Collection
Account to the extent such amounts are not required to be otherwise applied
pursuant to the terms of the related Mortgage Loan. Notwithstanding the
foregoing, the Master Servicer will be obligated to make any such advance only
to the extent that it determines in its reasonable good faith judgment that
such advance, if made, would be recoverable out of net proceeds (including any
amounts escrowed with respect to the related Mortgage Loan net of any
reasonably anticipated expenses payable therefrom) on the related Mortgage
Loan. None of the Servicers will be required to advance the full amount of any
Balloon Payment not made by the related Mortgagor. To the extent a Servicer is
required to make a P&I Advance on and after the Due Date for such Balloon
Payment, such P&I Advance shall not exceed an amount equal to a monthly payment
calculated by the Special Servicer necessary to fully amortize the related
Mortgage Loan over the period used for purposes of calculating the scheduled
monthly payments thereon prior to the related Maturity Date. Any failure by the
Master Servicer to make an advance as required under the Pooling and Servicing
Agreement will constitute an event of default thereunder, in which case the
Trustee will be obligated to make any required advance, in accordance with the
terms of the Pooling and Servicing Agreement.
Each Servicer shall be entitled to interest on the aggregate amount
of all advances made by such Servicer at a per annum rate equal to the prime
rate reported in The Wall Street Journal. See "Risk Factors -- Effect of
Mortgagor Delinquencies and Defaults" herein.
CERTAIN PREPAYMENT, MATURITY AND YIELD CONSIDERATIONS
GENERAL
The yield to maturity on the Offered Certificates will be affected
by the rate of principal payments on the Mortgage Loans including, for this
purpose, prepayments, which may include amounts received by virtue of
repurchase, condemnation, casualty or foreclosure. The rate of principal
payments on the Offered Certificates will correspond to the rate of principal
payments (including prepayments) on the related Mortgage Loans.
S-35
<PAGE>
Each Mortgage Loan either prohibits voluntary prepayments during a
certain number of years following the origination thereof and/or allows the
related Mortgagor to prepay the principal balance thereof in whole during a
certain number of years following the origination if accompanied by payment of
a Prepayment Premium. See Annex A hereto and the table entitled "Prepayment
Lock-out/Prepayment Premium Analysis" under "Description of the Mortgage Pool
- -- Certain Characteristics of the Mortgage Loans" herein. Any Net Prepayment
Premium collected on a Mortgage Loan will be distributed to the holders of the
Interest Only Certificates as described herein. See "Description of the
Certificates -- Distributions -- Interest Distributions on the Certificates"
and "Certain Prepayment, Maturity and Yield Considerations" herein, and "Yield
Considerations" in the Prospectus.
The yield to maturity on each class of the Offered Certificates
will depend on, among other things, the rate and timing of principal payments
(including prepayments, defaults, liquidations and purchases of Mortgage Loans
due to a breach of a representation and warranty) on the Mortgage Loans and the
allocation thereof to reduce the Class Balance or Notional Amount of such class
or its components. The yield to maturity on each class of the Offered
Certificates will also depend on the Pass-Through Rate and the purchase price
for such Certificates. The yield to investors on any Class of Offered
Certificates will be adversely affected by any allocation thereto of Prepayment
Interest Shortfalls on the Mortgage Loans, which may result from the
distribution of interest only to the date of a prepayment occurring during any
month following the related Determination Date (rather than a full month's
interest) to the extent any such interest shortfall is not offset by Prepayment
Premiums, any Prepayment Interest Excess or the portion of the Servicing Fee
for such Distribution Date allocable to the Master Servicer.
In general, if a class of Offered Certificates is purchased at a
premium and principal distributions thereon occur at a rate faster than
anticipated at the time of purchase, the investor's actual yield to maturity
will be lower than that assumed at the time of purchase. Conversely, if a class
of Offered Certificates is purchased at a discount and principal distributions
thereon occur at a rate slower than that assumed at the time of purchase, the
investor's actual yield to maturity will be lower than that assumed at the time
of purchase.
If a Mortgage Loan becomes a Specially Serviced Mortgage Loan, the
Special Servicer may adopt a servicing strategy which affects the yield to
maturity of one or more classes of Offered Certificates.
The Rated Final Distribution Date for the Certificates will be
_____________, 20___ which is the second anniversary of the date at which all
the Mortgage Loans have zero balances, assuming no prepayments and that the
Mortgage Loans which are Balloon Loans fully amortize according to their
amortization schedule and no Balloon Mortgage Payment is made.
WEIGHTED AVERAGE LIFE OF THE OFFERED CERTIFICATES
Weighted average life refers to the average amount of time from the
date of issuance of a security until each dollar of principal of such security
will be repaid to the investor. The weighted average life of the Offered
Certificates will be influenced by the rate at which principal payments
(including scheduled payments, principal prepayments and payments made pursuant
to any applicable policies of insurance) on the Mortgage Loans are made.
Principal payments on the Mortgage Loans may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
prepayments, partial prepayments and liquidations due to a default or other
dispositions of the Mortgage Loans).
The table of Percent of Initial Certificate Balance Outstanding for
the Class A1, Class A2, Class B, Class C, Class D and Class E Certificates at
the respective percentages of CPR set forth below indicates the weighted
average lives of such Certificates and sets forth the percentage of the initial
principal amount of such Certificates that would be outstanding after each of
the dates shown at the indicated percentages of CPR. The table has been
prepared on the basis of the characteristics of the Mortgage Loans set forth in
Annex A and on the basis of the following assumptions: (i) the Mortgage Loans
prepay at the indicated percentage of CPR when the Mortgage Loans are no longer
in their respective Lock-out Periods; (ii) the maturity date of each of the
Balloon Mortgage Loans is not extended; (iii) distributions on the Offered
Certificates are received in cash, on the ___ day of each month, commencing in
______________; (iv) no defaults or delinquencies in, or modifications, waivers
or amendments
S-36
<PAGE>
respecting, the payment by the Mortgagors of principal and interest on the
Mortgage Loans occur; (v) prepayments represent payment in full of individual
Mortgage Loans and are received on the respective Due Dates and include a
month's interest thereon; (vi) there are no repurchases of Mortgage Loans due
to breaches of any representation and warranty, or pursuant to an optional
termination as described under "Description of the Pooling and Servicing
Agreement -- Termination" herein or otherwise; and (vii) the Offered
Certificates are purchased on ______________.
Based on the foregoing assumptions, the table indicates the
weighted average lives of the Class A1, Class A2, Class B, Class C, Class D and
Class E Certificates and sets forth the percentages of the initial Class
Balance of each such class of Offered Certificates that would be outstanding
after the Distribution Date in _________ of each of the years indicated, at
various percentages of CPR. Neither CPR nor any other prepayment model or
assumption purports to be a historical description of prepayment experience or
a prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the Mortgage Loans included in the Mortgage Pool. Variations
in the actual prepayment experience and the balance of the Mortgage Loans that
prepay may increase or decrease the percentage of initial Class Balance (and
weighted average life) shown in the following table. Such variations may occur
even if the average prepayment experience of all such Mortgage Loans is the
same as any of the specified assumptions.
<TABLE>
<CAPTION>
PERCENT OF INITIAL CLASS BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR
CLASS A CLASS A2 CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
DATE -- -- -- -- -- -- -- -- -- -- -- --
----
Initial Percentage
WAL(1)
</TABLE>
<TABLE>
<CAPTION>
CLASS C CLASS D CLASS E
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
DATE -- -- -- -- -- -- -- -- -- -- -- --
----
Initial Percentage
WAL(1)
</TABLE>
(1) The weighted average life of a class of Offered Certificates is determined
by (i) multiplying the amount of each distribution of principal by the
number of years from the date of issuance to the related Distribution
Date, (ii) adding the results and (iii) dividing the sum by the total
principal distributions on such class of Certificates.
S-37
<PAGE>
INTEREST ONLY CERTIFICATES YIELD CONSIDERATIONS
The sensitivity of the yield to maturity on the Interest Only
Certificates to both the timing of receipt of prepayments and the overall rate
of principal prepayments and defaults on the Mortgage Loans will be offset to
some extent by the payment of a portion of any Net Prepayment Premium to the
Interest Only Certificates entitled thereto. No such offset is available
following a default on a Mortgage Loan.
The following tables indicate the sensitivity of the pre-tax yield
to maturity on the Interest Only Certificates to various constant rates of
prepayment on the Mortgage Loans by projecting the monthly aggregate payments
on the Interest Only Certificates 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
preceding the table entitled "Percent of Initial Class Balance Outstanding at
the Following Percentages of CPR" under the heading "Certain Prepayment,
Maturity and Yield Considerations -- Weighted Average Life of the Offered
Certificates" above, including the assumptions regarding the performance of the
Mortgage Loans which may differ from the actual performance thereof and
assuming the aggregate purchase prices and Pass-Through Rates set forth below
and assuming further that the initial Notional Amounts of the Interest Only
Certificates are as set forth herein. The yield maintenance calculations are
based on the market yield on ____________ of actively traded Treasury
securities of appropriate maturities. ____% of any Net Prepayment Premium will
be allocated to the Class A1X Certificates through the Distribution Date on
which the Class Balance of the Class A1 Certificates has been reduced to zero.
Thereafter, ____% of any Net Prepayment Premium will be allocated to the Class
A2X Certificates through the Distribution Date on which the Class Balance of
the Class A2 Certificates has been reduced to zero. Thereafter, ____% of any
Net Prepayment Premium will be allocated to the Class BCX Certificates through
the Distribution Date on which the Class Balances of the Class B and Class C
Certificates have been reduced to zero. Any differences between such
assumptions and the actual characteristics and performance of the Mortgage
Loans and of the Certificates may result in yields being different from those
shown in such tables. Discrepancies between assumed and actual characteristics
and performance underscore the hypothetical nature of the tables, which are
provided only to give a general sense of the sensitivity of yields in varying
prepayment scenarios.
<TABLE>
<CAPTION>
PRE-TAX YIELD TO MATURITY OF THE CLASS A1X CERTIFICATES
Assumed Purchase Price
as a Percentage of the
Notional Amount Assumed Pass-Through Rate(1) CPR Prepayment Assumption Rate
<S> <C> <C> <C> <C> <C>
0% % % %
</TABLE>
(1) Calculated based on the weighted average of the Remittance Rates of the
Mortgage Loans as of the Cut-off Date. The Pass-Through Rate on such
Certificates will be subject to adjustment on each Distribution Date.
<TABLE>
<CAPTION>
PRE-TAX YIELD TO MATURITY OF THE CLASS A2X CERTIFICATES
Assumed Purchase Price
as a Percentage of the
Notional Amount Assumed Pass-Through Rate(1) CPR Prepayment Assumption Rate
<S> <C> <C> <C> <C> <C>
0% % % %
</TABLE>
S-38
<PAGE>
(1) Calculated based on the weighted average of the Remittance Rates of the
Mortgage Loans as of the Cut-off Date. The Pass-Through Rate on such
Certificates will be subject to adjustment on each Distribution Date.
<TABLE>
<CAPTION>
PRE-TAX YIELD TO MATURITY OF THE CLASS BCX CERTIFICATES
Assumed Purchase Price
as a Percentage of the
Notional Amount Assumed Pass-Through Rate(1) CPR Prepayment Assumption Rate
<S> <C> <C> <C> <C> <C>
0% % % %
</TABLE>
(1) Calculated based on the initial weighted average of the Pass-Through Rates
of the components. The Pass-Through Rate on the Class BCX Certificates
will be subject to adjustment on each Distribution Date.
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 Interest Only Certificates
would cause the discounted present value of such assumed stream of cash flows
to equal the assumed purchase price listed in the corresponding table. Accrued
interest is included in the assumed purchase price of each class of Interest
Only Certificates and is used in computing the corporate bond equivalent yields
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 Interest Only Certificates, and thus do not reflect the return on any
investment in the Interest Only Certificates when, as applicable, any
reinvestment rates other than the discount rates set forth in the preceding
tables are considered.
Notwithstanding the assumed prepayment rates reflected in the
preceding tables, it is highly unlikely that the Mortgage Loans will be prepaid
according to one particular pattern. For this reason and because the timing of
cash flows is critical to determining yields, the pre-tax yield to maturity on
the Interest Only Certificates is likely to differ from those shown in the
tables, even if all of the Mortgage Loans prepay at the indicated constant
percentages of CPR over any given time period or over the entire life of the
Certificates.
There can be no assurance that the Mortgage Loans will prepay at
any particular rate or that the yield on the Interest Only Certificates will
conform to the yields described herein. Moreover, the various remaining terms
to maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the preceding tables at the various constant
percentages of CPR specified, even if the weighted average remaining term to
maturity of the Mortgage Loans is as assumed. Investors are urged to make their
investment decisions based on their determinations as to anticipated rates of
prepayment under a variety of scenarios. Investors in the Interest Only
Certificates should fully consider the risk that an extremely rapid rate of
prepayments on the Mortgage Loans could result in the failure of such investors
to fully recover their investments. In addition, holders of the Class A1X and
Class A2X Certificates generally have rights to relatively larger portions of
interest payments on Mortgage Loans with higher Mortgage Interest Rates; thus,
the yield on the Class A1X and Class A2X Certificates will be materially
adversely affected to a greater extent than on the other Interest Only
Certificates if the Mortgage Loans with higher Mortgage Interest Rates prepay
faster than the Mortgage Loans with lower Mortgage Rates.
For additional considerations relating to the yield on the
Certificates, see "Yield Considerations" in the Prospectus.
CLASS C, CLASS BCX, CLASS D AND CLASS E YIELD CONSIDERATIONS
If the Class Balances of the Other Certificates are reduced to
zero, the yield to maturity on the Class E Certificates will become extremely
sensitive to losses on the Mortgage Loans (and the timing thereof), because the
entire amount of such losses will be allocated to the Class E Certificates. The
aggregate initial Class Balance of the Other Certificates is equal to
approximately ____% of the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date. If the Class Balances of the Other Certificates and the
Class E Certificates are reduced to zero, the yield to maturity on the Class D
Certificates will become extremely sensitive to losses on the Mortgage Loans
(and the timing thereof), because the entire amount of such
S-39
<PAGE>
losses will be allocated to the Class D Certificates. The aggregate initial
Class Balance of the Class E and the Other Certificates is equal to
approximately ____% of the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date. If the Class Balances of the Other Certificates, the Class
E and the Class D Certificates are reduced to zero, the yield to maturity on
the Class C and Class BCX Certificates will become extremely sensitive to
losses on the Mortgage Loans (and the timing thereof), because the entire
amount of such losses will be allocated to the Class C and Class BCX
Certificates. The aggregate initial Class Balance of the Class D, Class E and
Other Certificates is equal to approximately ____% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date.
The Special Servicer will be entitled to receive, with respect to
each Specially Serviced Mortgage Loan compensation in the form of a percentage
of collections and a percentage of the outstanding principal balance of any
Specially Serviced Mortgage Loan which is returned to a performing status prior
to the right of Certificateholders to receive distributions on the
Certificates. Such compensation will result in shortfalls which will be
allocated to the Certificates in the manner provided for Realized Losses.
Consequently it is possible that shortfalls will be allocated to the Offered
Certificates with respect to any Specially Serviced Mortgage Loan
notwithstanding the fact that such Mortgage Loan is returned to a performing
status. See "Servicing -- Servicing and Other Compensation and Payment of
Expenses" herein.
The information set forth herein concerning the services has been
provided by the related Servicer. Neither the Depositor nor any other person
makes any representation or warranty as to the accuracy or completeness of such
information.
Investors are urged to make their investment decisions based on
their determinations as to anticipated rates of principal payments and Realized
Losses. Investors in the Class C and Class BCX Certificates and particularly
the Class D and Class E Certificates should fully consider to risk that
Realized Losses on the Mortgage Loans could result in a failure of such
investors to fully recover their investments. See "Yield Considerations" in the
Prospectus.
SERVICING
SERVICERS
____________________. _________________________ ("_________"), a
__________ corporation, will serve as Master Servicer for all the Mortgage
Loans.
As of __________________, 199__, ____________ was responsible for
managing and servicing of approximately _______ assets, consisting of loans,
foreclosed real estate assets and other assets with a total principal balance
in excess of $____billion of which $_____billion is administered under special
servicing contracts. ________ has provided servicing in some capacity for ____
portfolios securing commercial mortgage backed securities.
_______________________, a __________ corporation ("_________"),
will act as Special Servicer with respect to the Mortgage Loans.
As of __________________, 199__, ____________ was responsible for
managing and servicing of approximately _______ assets, consisting of loans,
foreclosed real estate assets and other assets with a total principal balance
in excess of $____billion of which $_____billion is administered under special
servicing contracts. ________ has provided servicing in some capacity for ____
portfolios securing commercial mortgage backed securities.
The information set forth herein concerning the Servicers has been
provided by the related Servicer. Neither the Depositor nor any other person
makes any representation or warranty as to the accuracy or completeness of such
information.
RESPONSIBILITIES OF MASTER SERVICER
Under the Pooling and Servicing Agreement, the Master Servicer is
required to service and administer the Mortgage Loans solely on behalf of and
in the best interests of and for the benefit of the Certificateholders, in
accordance with the terms of the Pooling and Servicing Agreement and the
Mortgage Loans and to the extent consistent with such terms, with the higher of
(a) the standard of care, skill, prudence and diligence with which the Master
Servicer, service and administer
S-40
<PAGE>
mortgage loans that are held for other portfolios that are similar to the
Mortgage Loans and (b) the standard of care, skill, prudence and diligence with
which the Master Servicer services and administers mortgage loans for its own
portfolio and are similar to the Mortgage Loans, giving due consideration to
customary and usual standards of practice of prudent institutional multifamily
and commercial mortgage lenders, loan servicers and asset managers.
RESPONSIBILITIES OF SPECIAL SERVICER
The servicing responsibility on a particular Mortgage Loan 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 becomes a "Defaulted Mortgage Loan" because it 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;
(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. A Mortgage Loan serviced by the
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. The Master Servicer
shall have no responsibility for the performance by the Special Servicer of its
duties under the Pooling and Servicing Agreement provided that the Master
Servicer continues to perform certain servicing functions on such Specially
Serviced Mortgage Loans and, based on the information provided to it by the
Special Servicer, prepares certain reports to the Trustee with respect to such
Specially Serviced Mortgage Loans. To the extent that any Mortgage Loan, in
accordance with its original terms or as modified in accordance with the
Pooling and Servicing Agreement, becomes a performing Mortgage Loan for a least
three consecutive months, the Special Servicer will return servicing of such
Mortgage Loan to the Master Servicer.
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 and
the Mortgage Loans and to the extent consistent with such terms, with the
higher of (a) the standard of care, skill, prudence and diligence with which
the Special Servicer services, administers and disposes of, distressed mortgage
loans and related real property that are held for other portfolios that are
similar to the Mortgage Loans, Mortgaged Property and REO Property and (b) the
standard of care, skill, prudence and diligence with which the Special Servicer
services, administers and disposes of distressed mortgage loans and related
real property for its own portfolio and are similar to the Mortgage Loans,
Mortgage Property and REO Property, giving due consideration to customary and
usual standards of practice of prudent institutional multifamily and commercial
mortgage lenders, loan servicers and asset managers, so as to maximize the net
present value of recoveries on the Mortgage Loans.
The Special Servicer shall have full power and authority to do any
and all things in connection with servicing and administering a Mortgage Loan
that it may deem in its best judgment necessary or advisable, including,
without limitation, to execute and deliver on behalf of the Trust Fund any and
all instruments of satisfaction or cancellation or of partial release or full
release or discharge and all other comparable instruments, to reduce the
related Mortgage Interest Rate, and to defer or forgive payment of interest
and/or principal with respect to any Specially Serviced Mortgage Loan or any
Mortgaged Property. The Special Servicer may not permit a modification of any
Mortgage Loan to extend the scheduled maturity date of any Specially Serviced
Mortgage Loan more than three years beyond the scheduled maturity date thereof
as of the Cut-off Date without the consent of the Extension Advisor. See
"--Extension Advisor" below. Notwithstanding the forgoing, the Special Servicer
may not permit any such modification with respect to a Balloon Mortgage Loan if
it results in the extension
S-41
<PAGE>
of such maturity date beyond the amortization term of such Balloon Mortgage
Loan absent the related Balloon Payment. The Special Servicer will prepare a
report (an "Asset Strategy Report") for each Mortgage Loan which becomes a
Specially Serviced Mortgage Loan not later than thirty (30) days after the
servicing of such Mortgage Loan is transferred to the Special Servicer. Each
Asset Strategy Report will be delivered to each holder of a Class F, Class G
and Class NR Certificate upon request. The holders of the fewest number of
classes of Certificates representing the most subordinate interests in the
Trust Fund that equals at least a ___% interest therein (the "Monitoring
Certificateholders") will designate one Monitoring Certificateholder pursuant
to the Pooling and Servicing Agreement (the "Directing Certificateholder").
Each Asset Strategy Report will be delivered to the Directing
Certificateholder. The Directing Certificateholder may object to any Asset
Strategy Report within 10 business days of receipt. If the Directing
Certificateholder does not disapprove an Asset Strategy Report within 10
business days, the Special Servicer shall implement the recommended action as
outlined in such Asset Strategy Report. If the Directing Certificateholder
disapproves such Asset Strategy Report and the Special Servicer has not made
the affirmative determination described below, the Special Servicer will revise
such Asset Strategy Report as soon as practicable. The Special Servicer will
revise such Asset Strategy Report until the Directing Certificateholder fails
to disapprove such revised Asset Strategy Report; provided, however, that the
Special Servicer shall implement the recommended action as outlined in such
Asset Strategy Report if it makes an affirmative determination that such
objection is not in the best interest of all Certificateholders. In connection
with making such affirmative determination, the Special Servicer may request a
vote by all the Certificateholders. Any Certificateholder may request and
obtain a copy of any Asset Strategy Report subject to delivery of a certificate
acknowledging certain possible limitations with respect to the use of such
report imposed by U.S. securities laws.
EXTENSION ADVISOR
The Extension Advisor will be responsible for approving any
proposed Mortgage Loan modification that extends the maturity date of a
Mortgage Loan by more than three (3) years beyond the scheduled maturity date
of such loan as of the Cut-off Date. The initial Extension Advisor, acting on
behalf of the holders of the Offered Certificates, shall only grant such
approvals if it shall have determined that the decision of the Special Servicer
to so modify the Mortgage Loan is consistent with the Special Servicer standard
set forth in the Pooling and Servicing Agreement. Any subsequent Extension
Advisor may grant such approvals if it shall have determined that the decision
of the Special Servicer to so modify the Mortgage Loan is in the best interest
of the Holders of the Offered Certificates.
The initial Extension Advisor will be _______________. At any time,
the holders of a majority of the outstanding aggregate Certificate Principal
Balance of the Offered Certificates may remove the Extension Advisor. In such
event, the Trustee will so inform such Certificateholders, and a majority of
Certificate Principal Balance of the holders of such Certificates shall have
the right to appoint a replacement Extension Advisor.
THE OPERATING ADVISER
The Pooling and Servicing Agreement permits the holder (or holders)
of Certificates representing more than 50% of the aggregate Certificate
Principal Balance of the most subordinate class of Certificates at any time of
determination (or, if the aggregate Certificate Principal Balance of such class
of Certificates is less than 25% of the original aggregate Certificate
Principal Balance thereof, of the next most subordinate class of Certificates)
(in any event, the "Controlling Class") to appoint any person or entity to act
as the representative of the Controlling Class to the extent described below
(such person or entity, in such capacity, the "Operating Adviser").
If the Special Servicer is not the Operating Adviser, the Special
Servicer will notify the Operating Adviser prior to the Special Servicer's
taking any of the following actions: (i) any foreclosure or comparable
conversion (which may include acquisition of any REO Property) of any Mortgaged
Property; (ii) any modification of a money term of a Mortgage Loan other than a
modification consisting of the extension of the original maturity of the
Mortgage Loan for two years or less; (iii) any proposed sale of a defaulted
Mortgage Loan or REO Property (other than upon termination of the Trust Fund
pursuant to the Pooling and Servicing Agreement); (iv) any determination to
bring an REO Property into compliance with applicable environmental laws; and
(v) any acceptance of substitute or additional collateral for a Mortgage Loan.
S-42
<PAGE>
The Operating Adviser may replace the Special Servicer, provided
that such replacement will be subject to, among other things, receipt from the
Rating Agencies of written confirmation that such replacement will not result
in a qualification, downgrade or withdrawal of any of the then-current ratings
assigned to any class of Certificates.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in
respect of its servicing activities will be the Servicing Fee. The Servicing
Fee will be payable monthly and will accrue at the applicable Servicing Fee
Rate and will be computed on the basis of the same principal amount and for the
same period respecting which any related interest payment on such Mortgage Loan
is computed. The Servicing Fee Rate for any Mortgage Loan will be the fee
payable to the Master Servicer as described below. The fee payable to the
Master Servicer with respect to the Mortgage Loans will equal _____% per annum.
The principal compensation to be paid to the Special Servicer in
respect of its special servicing activities will be the Special Servicing Fee.
The Special Servicing Fee will be payable monthly only from amounts received in
respect of each Specially Serviced Mortgage Loan. The Special Servicing Fee
will equal _____% of all amounts collected with respect to any Specially
Serviced Mortgage Loans and any Mortgage Loan which became a Specially Serviced
Mortgage Loan and was subsequently returned to a performing status.
CONFLICTS OF INTEREST
The Special Servicer or its affiliates own and are in the business
of acquiring assets similar to the Mortgage Loans held by the Trust Fund. To
the extent that any mortgage loans owned and/or serviced by the Special
Servicer or its affiliates are similar to the Mortgage Loans held by the Trust
Fund, the mortgaged properties related to such mortgage loans may, depending
upon certain circumstances such as the location of the mortgaged property,
compete with the Mortgaged Properties related to the Mortgage Loans held by the
Trust Fund for tenants, purchasers, financing and similar resources.
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of ___________, 199__ (the "Pooling And Servicing
Agreement"), by and among the Depositor, the Master Servicer, the Special
Servicer and the Trustee. Following are summaries of certain provisions of the
Pooling and Servicing Agreement. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Pooling and Servicing Agreement. The Trustee will provide to
a prospective or actual Certificateholder without charge, upon written request,
a copy (without exhibits) of the Pooling and Servicing Agreement. Requests
should be addressed to __________________________________________,
___________________________, Attention: Corporate Trust Department.
ASSIGNMENT OF THE MORTGAGE LOANS
On or prior to the Closing Date, _______ will assign the Mortgage
Loans, without recourse, to the Depositor, and the Depositor will assign all
the Mortgage Loans without recourse, to the Trustee for the benefit of the
Certificateholders. In connection with the foregoing, _______ is required in
accordance with the related Mortgage Loan Purchase Agreement to deliver the
following documents, among others, with respect to each Mortgage Loan so
assigned by it (such documents, collectively as to any Mortgage Loan, a
"Mortgage File") to the Trustee; (a) the original Mortgage Note, endorsed
(without recourse) to the order of the Trustee; (b) the original or a certified
copy of the related recorded Mortgage(s), together with originals or certified
copies of any intervening assignments of such document(s), in each case with
evidence of recording thereon (unless such document(s) have not been returned
by the applicable recorder's office); (c) the original or a copy of any related
recorded assignment(s) of rents and leases (if any such item is a document
separate from the Mortgage), together with originals or copies of any
intervening assignments of such document(s), in each case with evidence of
recording thereon (unless such document(s) have not been returned by the
applicable recorder's office); (d) an assignment of each related
S-43
<PAGE>
Mortgage in favor of the Trustee, in recordable form; (e) an assignment of any
related assignment(s) of rents and leases (if any such item is a document
separate from the Mortgage) in favor of the Trustee, in recordable form; (f) an
original or copy of the related lender's title insurance policy (or, if a title
insurance policy has not yet been issued, a commitment for title insurance
"marked-up" at the closing of such Mortgage Loan); and (g) when relevant, the
related ground lease or a certified copy thereof. The Trustee will be required
to review the documents delivered by each Seller with respect to its Mortgage
Loans within 90 days following the Closing Date, and the Trustee will hold the
related documents in trust.
Within 45 days following the Closing Date, pursuant to the Pooling
and Servicing Agreement, the assignments with respect to each Mortgage Loan
described in clauses (d) and (e) of the preceding paragraph are to be submitted
for recording in the real property records of the appropriate jurisdictions.
TRUSTEE
____________________ shall serve as Trustee under the Pooling and
Servicing Agreement pursuant to which the Certificates are being issued. Except
in circumstances such as those involving defaults (when it might request
assistance from other departments in the bank), its responsibilities as trustee
are carried out by its Corporate Trust Department. Its principal corporate
trust office is located at __________________________________.
COLLECTION ACCOUNT AND CERTIFICATE ACCOUNT
The Master Servicer is required to deposit all amounts received
with respect to the Mortgage Loans, net of certain amounts retained by the
Master Servicer as additional servicing compensation, into a Collection Account
(the "Collection Account") maintained by the Master Servicer for the Trust
Fund. The Master Servicer is required to deposit on the business day preceding
each Distribution Date all amounts received with respect to the Mortgage Loans
into a separate account (the "Certificate Account") maintained with the
Trustee. Interest or other income earned on funds in the Collection Account
will be paid to the Master Servicer as additional servicing compensation. See
"Description of the Trust Funds -- Mortgage Loans" and "Description of the
Agreements -- Accounts -- Distribution Account" in the Prospectus.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date the Trustee shall furnish to each
Certificateholder, to the Depositor and to each Rating Agency a statement
setting forth certain information with respect to the Mortgage Loans and the
Certificates required pursuant to the Pooling and Servicing Agreement and in
the form of Annex B hereto. In addition, within a reasonable period of time
after each calendar year, the Trustee shall furnish to each person who at any
time during such calendar year was the holder of a Certificate a statement
containing certain information with respect to the Certificates required
pursuant to the Pooling and Servicing Agreement, aggregated for such calendar
year or portion thereof during which such person was a Certificateholder.
Unless and until Definitive Certificates are issued, such statements or reports
will be furnished only to Cede & Co., as nominee for DTC; provided, however,
that the Trustee shall furnish a copy of any such statement or report to any
Beneficial Owner which requests such copy and certifies to the Trustee that it
is the Beneficial Owner of a Certificate. The Trustee shall furnish a copy of
any such statement or report to any person who requests it for a nominal
charge. Any person may call the Master Servicer at ______________ in order to
inquire as to how to obtain such statement or report. Such statement or report
may be available to Beneficial Owners upon request to DTC or their respective
Participant or Indirect Participants. Any Asset Strategy Report shall be
delivered by the Trustee upon request to any Beneficial Owner of an Offered
Certificate subject to the second preceding sentence and the receipt by the
Trustee of a certificate acknowledging certain limitations with respect to the
use of such statement or report. See "Description of the Certificates --
Reports to Certificateholders" in the Prospectus. The Directing
Certificateholder shall receive all reports prepared or received by the Master
Servicer or the Special Servicer. In addition, each other Certificateholder may
obtain all such reports at its expense as described in the Pooling and
Servicing Agreement.
VOTING RIGHTS
At all times during the term of this Agreement, _____% of all
Voting Rights shall be allocated among the classes of Certificates (other than
the Interest Only Certificates) in proportion to the respective Class Balances,
_____% of all Voting Rights shall be allocated to each class of Interest Only
Certificates and _______% of all Voting Rights shall be allocated to
S-44
<PAGE>
each class of Residual Certificates. Voting Rights allocated to a class of
Certificates shall be allocated among the holders of such class in proportion
to the Percentage Interests evidenced by their respective Certificates.
As described under "Description of the Certificates -- Book-Entry
Registration and Definitive Certificates" in the Prospectus, unless and until
Definitive Certificates are issued, except as otherwise expressly provided
herein, Certificate Owners may only exercise their rights as owners of
Certificates indirectly through DTC or their respective Participant or Indirect
Participant.
TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment or other liquidation
of the last Mortgage Loan or REO Property subject thereto, and (ii) the
purchase of all of the assets of the Trust Fund by any of the Master Servicer,
the Special Servicer, any holder of a Class R-I Certificate and the holders of
an aggregate Percentage Interest in excess of 50% of the Most Subordinate Class
of Certificates. The "Most Subordinate Class Of Certificates" at the time of
determination shall be the class of Certificates to which Realized Losses would
be allocated at such time as described under "Description of the Certificates
- -- Subordination" herein. Written notice of termination of the Pooling and
Servicing Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at the office of the Certificate Registrar specified in such
notice of termination. Any such purchase of all the Mortgage Loans and other
assets in the Trust Fund is required to be made at a price equal to the greater
of (1) the aggregate fair market value of all the Mortgage Loans and REO
Properties then included in the Trust Fund, determined pursuant to the Pooling
and Servicing Agreement, and (2) the aggregate Class Balance of all the
Certificates plus accrued and unpaid interest thereon. Such purchase will
effect early retirement of the then outstanding Certificates, but the right to
effect such termination is subject to the requirement that the aggregate Stated
Principal Balance of the Mortgage Loans then in the Trust Fund is less than
____% of the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date.
USE OF PROCEEDS
The net proceeds from the sale of the Certificates will be used by
the Depositor to pay the purchase price of the Mortgage Loans.
FEDERAL INCOME TAX CONSEQUENCES
The following summary, in the opinion of Latham & Watkins, counsel
to the Depositor, sets forth the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered
Certificates. This summary is based on laws, regulations, including the REMIC
regulations promulgated by the Treasury Department (the "REMIC Regulations"),
rulings and decisions now in effect or (with respect to regulations) proposed,
all of which are subject to change either prospectively or retroactively. This
summary does not address the federal income tax consequences of an investment
in Offered Certificates applicable to all categories of investors, some of
which (for example, banks and insurance companies) may be subject to special
rules. Prospective investors should consult their tax advisors regarding the
federal, state, local and any other tax consequences to them of the purchase,
ownership and disposition of Offered Certificates.
Three separate REMIC elections will be made with respect to the
Trust Fund for federal income tax purposes. Upon the issuance of the
Certificates, counsel to the Depositor, will deliver its opinion that, assuming
compliance with all provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, REMIC I, REMIC II and REMIC III (each as defined
in the Pooling and Servicing Agreement) each will qualify as a REMIC under the
Code.
For federal income tax purposes, the Class R-I Certificates will be
the sole class of "residual interests" in REMIC I, the Class R-II Certificates
will be the sole class of "residual interests" in REMIC II, the Offered
Certificates (or, in the case of the Class BCX Certificates, each component
thereof) and the Class F, Class G and Class NR Certificates will be "regular
interests" of REMIC III and will be treated as debt instruments of the REMIC
III, and the Class R-III Certificates will be the sole class of "residual
interests" in REMIC III.
S-45
<PAGE>
See "Federal Income Tax Consequences -- REMICs" in the Prospectus.
The Interest Only Certificates will, and the other classes of
Offered Certificates may, be treated as having been issued with original issue
discount for federal income tax reporting purposes. For purposes of computing
the rate of accrual of original issue discount, market discount and premium, if
any, for federal income tax purposes it will be assumed that there are no
prepayments on the Mortgage Loans. No representation is made that the Mortgage
Loans will not prepay at another rate. See "Federal Income Tax Consequences --
REMICs -- Taxation of Owners of REMIC Regular Certificates" and "--Original
Issue Discount and Premium" in the Prospectus.
Prepayment Premiums allocated to the Certificates will be taxable
to the holders of such Certificates on the date the amount of such premiums
becomes fixed.
The Offered Certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of such a class
of Certificates will be treated as holding a certificate with amortizable bond
premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of such class of Certificates
should consult their own tax advisors regarding the possibility of making an
election to amortize such premium. See "Federal Income Tax Consequences --
REMICs -- Taxation of Owners of REMIC Regular Certificates" and "--Premium" in
the Prospectus.
The Offered Certificates will be treated as "qualifying real
property loans" within the meaning of Section 593(d) of the Code and "real
estate assets" within the meaning of Section 856(c)(5)(B) of the Code generally
in the same proportion that the assets of the REMIC underlying such
Certificates would be so treated. In addition, interest (including original
issue discount) on the Offered Certificates will be interest described in
Section 856(c)(3)(B) of the Code to the extent that such Offered Certificates
are treated as "real estate assets" under Section 856(c)(5)(B) of the Code.
Moreover, the Offered Certificates will be "obligation[s]...which... [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code and will be "regular interests in a REMIC"
which may qualify for treatment as "permitted assets" of a FASIT within the
meaning of Section 860L(c)(1)(G) of the Code. The Offered Certificates will not
be considered to represent an interest in "loans...secured by an interest in
real property" within the meaning of Section 7701 (a)(19)(C)(v) of the Code
except in the proportion that the assets of the Trust Fund are represented by
Mortgage Loans secured by multifamily apartment buildings. See "Federal Income
Tax Consequences -- REMICs -- Characterization of Investments in REMIC
Certificates" in the Prospectus.
For further information regarding the federal income tax
consequences of investing in the Certificates, see "Federal Income Tax
Consequences" in the Prospectus.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences," potential investors should consider the
state income tax consequences of the acquisition, ownership, and disposition of
the Offered Certificates. State income tax law may differ substantially from
the corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisors with respect to the various tax
consequences of investments in the Offered Certificates.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan
or arrangement, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such
plans, accounts or arrangements are invested, and any entity whose underlying
assets include assets of such a plan by reason of any such plan's investment in
the entity that is subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the Code (each, a "Plan") should
carefully review with its legal advisors whether the purchase or holding of any
Class of Offered Certificates could give rise to a transaction that is
prohibited or is not otherwise permitted either under ERISA or Section 4975 of
the Code.
S-46
<PAGE>
The U.S. Department of Labor issued an individual exemption,
Prohibited Transaction Exemption _______ (the "Exemption"), to
________________, which generally exempts from the application of certain
prohibited transaction provisions of Section 406 of ERISA, and the excise taxes
imposed on such prohibited transactions pursuant to Sections 4975(a) and (b) of
the Code and Section 502(i) of ERISA, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the purchase,
sale and holding of mortgage pass-through certificates underwritten by an
Underwriter (as hereinafter defined), provided that certain conditions set
forth in the Exemption are satisfied. For purposes of this Section "ERISA
Considerations", the term "Underwriter" shall include (a) ________________, (b)
any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with _______________ and (c)
any member of the underwriting syndicate or selling group of which a person
described in (a) or with (b) is a manager or co-manager with respect to the
Class A1, Class A1X, Class A2 and Class A2X Certificates.
The Exemption sets forth six general conditions which must be
satisfied for a transaction involving the purchase, sale and holding of such
Classes of Offered Certificates to be eligible for exemptive relief thereunder.
First, the acquisition of such Classes of Offered Certificates by a Plan, must
be on terms (including the price) that are at least as favorable to the Plan as
they would be in an arm's-length transaction with an unrelated party. Second,
the rights and interests evidenced by such Classes of Offered Certificates must
not be subordinate to the rights and interests evidenced by the other
certificates of the same trust. Third, such Classes of Offered Certificates at
the time of acquisition by the Plan must be rated in one of the three highest
generic rating categories by Standard & Poor's Corporation, Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors Service, Inc.
Fourth, the Trustee cannot be an affiliate of any member of the "Restricted
Group," which consists of the Underwriter, the Depositor, the Master Servicer,
the Special Servicer and any Mortgagor with respect to Mortgage Loans
constituting more than 5% of the aggregate unamortized principal balance of the
Mortgage Loans as of the date of initial issuance of such Classes of Offered
Certificates. Fifth, the sum of all payments made to and retained by the
Underwriter must represent not more than reasonable compensation for
underwriting such Classes of Offered Certificates; the sum of all payments made
to and retained by the Depositor pursuant to the assignment of the Mortgage
Loans to the Trust Fund must represent not more than the fair market value of
such obligations; and the sum of all payments made to and retained by the
Master Servicer and the Special Servicer must represent not more than
reasonable compensation for such person's services under the Agreements and
reimbursement of such person's reasonable expenses in connection therewith.
Sixth, the investing Plan must be an accredited investor as defined in Rule 501
(a)(1) of Regulation D of the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
Because the Class A1, Class A1X, Class A2 and Class A2X
Certificates are not subordinate to any other class of Certificates, the second
general condition set forth above is satisfied with respect to such
Certificates. It is a condition of the issuance of such Classes of Certificates
that they be rated "______" by ________________ and either "____" or "____" by
________________. A fiduciary of a Plan contemplating purchasing any such Class
of Certificates in the secondary market must make its own determination that at
the time of such acquisition, any such Class of Certificates continues to
satisfy the third general condition set forth above. The Depositor expects that
the fourth general condition set forth above will be satisfied with respect to
each of such Classes of Certificates. A fiduciary of a Plan contemplating
purchasing any such Class of Certificate must make its own determination that
the first, third, fifth and sixth general conditions set forth above will be
satisfied with respect to any such Class of Certificate.
The Class B, Class C, Class BCX, Class D and Class E do not satisfy
the second condition described above because they are subordinated to the Class
A1, Class A1X, Class A2 and Class A2X Certificates, and furthermore the Class D
and Class E Certificates are not expected to satisfy the third condition
described above.
Before purchasing any Class of Certificate, a fiduciary of a Plan
should itself confirm (a) that such Certificates constitute "certificates" for
purposes of the Exemption and (b) that the specific and general conditions of
the Exemption and the other requirements set forth in the Exemption would be
satisfied. In addition to making its own determination as to the availability
of the exemptive relief provided in the Exemption, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions.
Purchasers using insurance company general account funds to effect
such purchase should consider the availability of Prohibited Transaction Class
Exemption 95-60 (60 Fed. Reg. 35925, July 12, 1995) issued by the U.S.
Department of Labor.
S-47
<PAGE>
Any Plan fiduciary considering whether to purchase any Class of
Certificate on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment. See "ERISA Considerations"
in the Prospectus.
LEGAL INVESTMENT
The Class ___, Class ___, Class ___, Class ___ and Class ___
Certificates will be "mortgage related securities" within the meaning of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") for so long as they
are rated in one of the two highest rating categories by at least one
nationally recognized statistical rating organization. The Class ___, Class ___
and Class ___ Certificates will not be "mortgage related securities" within the
meaning of SMMEA.
In addition, institutions whose investment activities are subject
to review by certain regulatory authorities may be or may become subject to
restrictions, which may be retroactively imposed by such regulatory
authorities, on the investment by such institutions in certain forms of
mortgage-backed securities. Furthermore, certain states have enacted
legislation overriding the legal investment provisions of SMMEA.
The Depositor makes no representations as to the proper
characterization of the Offered Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase the Offered
Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of the Offered Certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Offered Certificates constitute a
legal investment or are subject to investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated _____________, 199___ (the "Underwriting Agreement"), the
Underwriter has agreed to purchase and the Depositor has agreed to sell to the
Underwriter the Offered Certificates. It is expected that delivery of the
Offered Certificates will be made only in book-entry form through the Same Day
Funds Settlement System of DTC on or about ______________, 199___, against
payment therefor in immediately available funds.
In the Underwriting Agreement, the Underwriter has agreed, subject
to the terms and conditions set forth therein, to purchase all of the Offered
Certificates if any are purchased. In the event of default by the Underwriter,
the Underwriting Agreement provides that, in certain circumstances, the
underwriting may be terminated.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of its Certificates is subject to,
among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of
the Depositor's Registration Statement shall be in effect, and that no
proceedings for such purpose shall be pending before or threatened by the
Securities and Exchange Commission.
The distribution of the Offered Certificates by the Underwriter may
be effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds to
the Depositor from the sale of the Offered Certificates, before deducting
expenses payable by the Depositor, will be approximately ____________% of the
aggregate principal balance of the Offered Certificates as of the Cut-off Date,
plus accrued interest from the Cut-off Date. The Underwriter may effect such
transactions by selling its Certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter for whom they act as agent. In
connection with the sale of the Offered Certificates, the Underwriter may be
deemed to have received compensation from the Depositor in the form of
underwriting compensation. The Underwriter and any dealers that participate
with the Underwriter in the distribution of the Offered Certificates may be
deemed to be underwriters and any profit on the resale of the Offered
Certificates positioned by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended.
S-48
<PAGE>
The Underwriting Agreement provides that the Depositor will
indemnify the Underwriter, and that under limited circumstances the Underwriter
will indemnify the Depositor, against certain civil liabilities under the
Securities Act of 1933, as amended, or contribute to payments to be made in
respect thereof.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of ongoing information available to investors concerning the
Offered Certificates will be the reports discussed herein under "Description of
the Pooling and Servicing Agreement -- Reports to Certificateholders." Except
as described herein under "Description of the Pooling and Servicing Agreement
- -- Reports to Certificateholders", there can be no assurance that any
additional information regarding the Offered Certificates will be available
through any other source. In addition, the Depositor is not aware of any source
through which price information about the Offered Certificates will be
generally available on an ongoing basis. The limited nature of such information
regarding the Offered Certificates may adversely affect the liquidity of the
Offered Certificates, even if a secondary market for the Offered Certificates
becomes available.
S-49
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by
_______________, ____________, ; and certain legal matters will be passed upon
for the Underwriter by __________________, _________________, ____________.
RATING
It is a condition of issuance of the Class A1 and Class A2
Certificates be rated "____" by _____________ ("________________ ") and
________________ ("________________ "). It is a condition of the issuance of
the Class A1X and Class A2X Certificates that they be rated "______" by
________________ and "_____" by ________________. It is a condition of the
issuance of the Class B Certificates that they be rated not lower than "___" by
________________ and ________________. It is a condition of the issuance of the
Class C Certificates that they be rated not lower than "__" by ________________
and "___" by ________________. It is a condition to the issuance of the Class
BCX Certificates that they be rated not lower than "___" by ________________.
It is a condition of the issuance of the Class D Certificates that they be
rated not lower than "___" by ________________ and ________________. It is a
condition to the issuance of the Class E Certificates that they be rated not
lower than "______" by ________________ and ________________.
The ratings on mortgage pass-through certificates address the
likelihood of the receipt by holders thereof of payments to which they are
entitled including the receipt of all principal payments by the Rated Final
Distribution Date. Such ratings take into consideration the credit quality of
the mortgage pool, structural and legal aspects associated with the
certificates, and the extent to which the payment stream in the mortgage pool
is adequate to make payments required under the certificates. Such ratings on
the Offered Certificates do not, however, constitute a statement regarding
frequency or likelihood of prepayments (whether voluntary or involuntary) of
the Mortgage Loans, or the degree to which such prepayments might differ from
those originally anticipated, or the likelihood of the collection of Prepayment
Premiums, and do not address the possibility that Certificateholders might
suffer a lower than anticipated yield. The ratings of the Interest Only
Certificates does not address the possibility that the holders of such
Certificates may fail to fully recover their initial investments due to a rapid
rate of prepayments, defaults or liquidations. See "Risk Factors" herein.
There can be no assurance as to whether any rating agency not
requested to rate the Offered Certificates will nonetheless issue a rating and,
if so, what such rating would be. A rating assigned to the Offered Certificates
by a rating agency that has not been requested by the Depositor to do so may be
lower than the rating assigned by ________________ or ________________ pursuant
to the Depositor's request.
The rating of the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating agency.
Each security rating should be evaluated independently of any other security
rating. A security rating does not address the frequency or likelihood of
prepayments (whether voluntary or involuntary) of Mortgage Loans, or the
corresponding effect on the yield to investors.
The ratings do not address the fact that the Pass-Through Rates on
the Offered Certificates, to the extent determined based on the Remittance
Rates, may be affected by changes therein.
S-50
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
30/360 Basis.............................................................................................................4, 31
ACMs........................................................................................................................14
Acute Care Facilities.......................................................................................................32
Adjusted Available Distribution Amount...................................................................................4, 31
Adjusted Collateral Value...................................................................................................34
Asset Strategy Report.......................................................................................................42
Assisted Living Facilities..................................................................................................32
Available Distribution Amount...............................................................................................30
Balloon Mortgage Loan........................................................................................................2
Balloon Payment..............................................................................................................2
Beneficial Owner.........................................................................................................1, 29
Cash Flow Agreements..............................................................................3, 9, 15, 21, 27, 34, 40, 46
Cede........................................................................................................................29
CERCLA......................................................................................................................14
Certificate Account.........................................................................................................44
Certificates...................................................................................3, 9, 15, 21, 27, 34, 40, 46, i
Class Balance...............................................................................................................ii
CMBS..............................................................................................3, 9, 15, 21, 27, 34, 40, 46
Code.........................................................................................................................9
Collateral Value Adjustment.................................................................................................34
Collection Account..........................................................................................................44
Component....................................................................................................................3
CON 33
Controlling Class...........................................................................................................42
Credit Support....................................................................................3, 9, 15, 21, 27, 34, 40, 46
Custodian....................................................................................................................1
Cut-Off Date.................................................................................................................i
Cut-Off Date LTV Ratio......................................................................................................22
Debt Service Coverage Ratio.................................................................................................23
Defaulted Mortgage Loan.....................................................................................................41
Definitive Certificate...................................................................................................1, 29
Delivery Date................................................................................................................i
Depositor................................................................................................................ii, 1
Determination Date...........................................................................................................5
Directing Certificateholder.................................................................................................42
Distribution Date....................................................................................................ii, 1, 30
DSCR........................................................................................................................23
DTC iii, 1, 29
DTC Registered Certificates..............................................................................................1, 29
Due Date.....................................................................................................................2
ERISA...................................................................................................................10, 46
ESA 15
Exemption...................................................................................................................47
FIRREA......................................................................................................................22
Form 8-K....................................................................................................................28
Health Care-Related Facilities..............................................................................................32
S-51
<PAGE>
<CAPTION>
<S> <C>
Health Care-Related Mortgaged Property......................................................................................32
Interest Accrual Amount..................................................................................................4, 31
Interest Distribution Amount.............................................................................................4, 31
Interest Only Certificates..................................................................................................ii
Lease Assignment..................................................................................3, 9, 15, 21, 27, 34, 40, 46
Loan Sale Agreement.........................................................................................................18
Lock-Out Date...............................................................................................................26
Lock-Out Period.............................................................................................................26
Loss Mortgage Loan..........................................................................................................34
Master Servicer.............................................................................................................ii
Maturity Date LTV Ratio.....................................................................................................22
Monitoring Certificateholders...............................................................................................42
Monthly Payments.............................................................................................................2
Mortgage....................................................................................................................17
Mortgage Assets...................................................................................3, 9, 15, 21, 27, 34, 40, 46
Mortgage File...............................................................................................................43
Mortgage Loans................................................................................3, 9, 15, 21, 27, 34, 40, 46, ii
Mortgage Note...............................................................................................................17
Mortgage Pool...............................................................................................................ii
Mortgaged Property.......................................................................................................2, 17
Mortgagor....................................................................................................................2
Most Subordinate Class Of Certificates......................................................................................45
Net Operating Income........................................................................................................23
Net Prepayment Premium......................................................................................................32
Notional Amount.............................................................................................................ii
Offered Certificates...........................................................................3, 9, 15, 21, 27, 34, 40, 46, i
Operating Adviser...........................................................................................................42
Originators.............................................................................................................ii, 17
Other Certificates...........................................................................................................6
P&I Advances.............................................................................................................6, 35
Participants.................................................................................................................2
Pass-Through Rate.......................................................................................................ii, 31
Percentage Interest.........................................................................................................30
Plan........................................................................................................................46
Pooling And Servicing Agreement..........................................................................................3, 43
Prepayment Interest Excess..................................................................................................32
Prepayment Interest Shortfall...............................................................................................32
Prepayment Premium.......................................................................................................3, 26
Principal Distribution Amount............................................................................................5, 32
Property Protection Expenses................................................................................................35
Prospectus Supplement.............................................................................3, 9, 15, 21, 27, 34, 40, 46
Realized Loss...............................................................................................................34
Record Date..................................................................................................................1
REMIC...................................................................................................................iii, 9
REMIC Regulations...........................................................................................................45
Remittance Period............................................................................................................5
S-52
<PAGE>
<CAPTION>
<S> <C>
Remittance Rate.............................................................................................................31
REO Account.................................................................................................................29
REO Property................................................................................................................28
Restricted Group............................................................................................................47
Rules.......................................................................................................................29
Section 42 Properties........................................................................................................7
Senior Housing..............................................................................................................32
Series............................................................................................3, 9, 15, 21, 27, 34, 40, 46
Servicer.....................................................................................................................6
Servicing Transfer Event....................................................................................................41
Skilled Nursing Facilities..................................................................................................32
SMMEA...................................................................................................................11, 48
Special Servicer............................................................................................................ii
Specially Serviced Mortgage Loan.........................................................................................9, 41
Stated Principal Balance....................................................................................................34
Trust Fund....................................................................................3, 9, 15, 21, 27, 34, 40, 46, ii
Underwriter..............................................................................................................i, 47
Underwriting Agreement......................................................................................................48
</TABLE>
S-53
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS
OF THE MORTGAGE LOANS
[ANNEX A TO FOLLOW THIS PAGE]
A-1
<PAGE>
ANNEX B
FORM OF MONTHLY REPORT
[ANNEX B TO FOLLOW THIS PAGE]
B-1
<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. The securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement become
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 any such State.
SUBJECT TO COMPLETION, DATED JUNE 24, 1998
HELLER FINANCIAL COMMERCIAL MORTGAGE ASSET CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
The mortgage pass-through certificates (the "Offered Certificates")
offered hereby and by supplements hereto (each, a "Prospectus Supplement") will
be offered from time to time in one or more series (each, a "Series"). The
Offered Certificates of any Series, together with any other mortgage
pass-through certificates of such Series, are collectively referred to herein
as the "Certificates". Each Series of Certificates will represent in the
aggregate the entire beneficial ownership interest in a trust fund (with
respect to any Series, the "Trust Fund") consisting of one or more segregated
pools of various types of multifamily or commercial mortgage loans (the
"Mortgage Loan"), mortgage participations, mortgage pass-through certificates
or other mortgage-backed securities evidencing interests in or secured by
multifamily or commercial mortgage loans (collectively, the "CMBS") or a
combination or Mortgage Loan and /or CMBS (with respect to any Series,
collectively, the "Mortgage Assets"). If so specified in the related Prospectus
Supplement, some or all of the Mortgage Loans will include assignments of the
leases of the related Mortgaged Properties (as defined herein) and/or
assignments to the rental payments due from the lessees under such leases (each
type of assignment, a "Lease Assignment"). A significant or the sole source of
payments on certain Commercial Loans (as defined herein) and, therefore, of
distributions on certain Series of Certificates, will be such rent payments. If
so specified in the related Prospectus Supplement, the Trust Fund for a Series
of Certificates may include letters of credit, insurance policies, guarantees,
reserve funds or other types of credit support, or any combination thereof
(with respect to any Series, collectively, ("Credit Support"), and currency or
interest rate exchange agreements and other financial assets, or any
combination thereof (with respect to any Series, collectively, "Cash Flow
Agreements"). See "Description of the Trust Funds," "Description of the
Certificates" and "Description of Credit Support."
Retain this Prospectus for future reference. This Prospectus may not
be used to consummate sales of the Offered Certificates of any Series unless
accompanied by the Prospectus Supplement for such Series.
(cover continued on next page)
--------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE CERTIFICATES OF EACH SERIES WILL NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, ANY MASTER SERVICER, ANY SPECIAL
SERVICER, THE TRUSTEE, THE UNDERWRITER OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR ANY ASSETS IN THE RELATED TRUST
FUND WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY OR BY ANY OTHER PERSON, EXCEPT TO THE EXTENT PROVIDED
IN THE RELATED PROSPECTUS SUPPLEMENT. THE ASSETS IN EACH TRUST
FUND WILL BE HELD IN TRUST FOR THE BENEFIT OF THE HOLDERS OF THE
RELATED SERIES OF CERTIFICATES PURSUANT TO A POOLING AND SERVICING
AGREEMENT OR A TRUST AGREEMENT, AS MORE FULLY DESCRIBED HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 17 HEREIN AND SUCH INFORMATION AS
MAY BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS
SUPPLEMENT BEFORE PURCHASING ANY OFFERED CERTIFICATE.
Prior to issuance there will have been no market for the Certificates
of any Series and there can be no assurance that a secondary market for any
Offered Certificates will develop or that, if it does develop, it will
continue. This Prospectus may not be used to consummate sales of the Offered
Certificates of any Series unless accompanied by the Prospectus Supplement for
such Series.
Offers of the Offered Certificates may be made through one or more
different methods, including offerings through underwriters as more fully
described under "Method of Distribution" herein and the related Prospectus
Supplement."
--------------
The date of this Prospectus is June 24, 1998
<PAGE>
Each Series of Certificates will consist of one or more classes of
Certificates that may (i) provide for the accrual of interest thereon based on
fixed, variable or floating rates; (ii) be senior or subordinate to one or more
other classes of Certificates in respect of certain distributions on the
Certificates; (iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions; (iv) be entitled
to interest distributions, with disproportionately low, nominal or no principal
distributions; (v) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events, such as the
retirement of one or more other classes of Certificates of such Series; (vi)
provide for distributions of principal sequentially, based on specified payment
schedules or other methodologies; and/or (vii) provide for distributions based
on a combination of two or more components thereof with one or more of the
characteristics described in this paragraph, to the extent of available funds,
in each case as described in the related Prospectus Supplement. Any such
classes may include classes of Offered Certificates. See "Description of the
Certificates."
Principal and interest with respect to Certificates will be
distributable monthly, quarterly, semi-annually or at such other intervals and
on the dates specified in the related Prospectus Supplement. Distributions on
the Certificates of any Series will be made only from the assets of the related
Trust Fund.
The yield on each class of Certificates of a Series will be affected
by, among other things, the rate of payment of principal (including
prepayments, repurchase and defaults) on the Mortgage Assets in the related
Trust Fund and the timing of receipt of such payments as described under the
caption "Yield Considerations" herein and under the caption "Certain
Prepayment, Maturity and Yield Considerations" in the related Prospectus
Supplement. A Trust Fund may be subject to early termination under the
circumstances described herein and in the related Prospectus Supplement.
All CMBS will have been acquired for inclusion in a Trust Fund in
purely secondary transactions from a seller other than the issuer thereof and
any of its affiliates. The factors considered by the Registrant in determining
that the CMBS have been acquired in purely secondary market transactions
include the following: the Depositor's historical relationship with the
underlying issuer, whether or not any distribution by the Depositor with
respect to other securities of that issuer is presently occurring or being
considered, whether the Depositor was involved in the initial distribution of
the underlying securities, and the period of time elapsed between initial
distribution and the securitization transaction.
If so provided in the related Prospectus Supplement, one or more
elections may be made to treat the related Trust Fund or a designated portion
thereof as a "real estate mortgage investment conduit" (each, a "REMIC") for
federal income tax purposes. See "Federal Income Tax Consequences" herein.
Until 90 days after the date of each Prospectus Supplement, all
dealers effecting transactions in the Offered Certificates covered by such
Prospectus Supplement, whether or not participating in the distribution
thereof, may be required to deliver such Prospectus Supplement and this
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus and Prospectus Supplement when acting as underwriters and with
respect to their unsold allotments or subscriptions.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any
Prospectus Supplement with respect hereto and, if given or made, such
information or representations must not be relied upon. This Prospectus and any
Prospectus Supplement with respect hereto do not constitute an offer to sell or
a solicitation of an offer to buy any securities other than the Offered
Certificates or an offer of the Offered Certificates to any person in any state
or other jurisdiction in which such offer would be unlawful. The delivery of
this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date; however, if any material change occurs
while this Prospectus is required by law to be delivered, this Prospectus will
be amended or supplemented accordingly.
<PAGE>
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement
relating to the Offered Certificates of each Series will, among other things,
set forth with respect to such Certificates, as appropriate: (i) a description
of the class or classes of Certificates, the payment provisions with respect to
each such class and the Pass-Through Rate or method of determining the
Pass-Through Rate with respect to each such class; (ii) the aggregate principal
amount and distribution dates relating to such Series and, if applicable, the
initial and final scheduled distribution dates for each class; (iii)
information as to the assets comprising the Trust Fund, including the general
characteristics of the assets included therein, including the Mortgage Assets
and any Credit Support and Cash Flow Agreements (with respect to the
Certificates of any Series, the "Trust Assets"); (iv) the circumstances, if
any, under which the Trust Fund may be subject to early termination; (v)
additional information with respect to the method of distribution of such
Certificates; (vi) whether one or more REMIC elections will be made and
designation of the regular interests and residual (or ownership) interests;
(vii) the aggregate original percentage ownership interest in the Trust Fund to
be evidenced by each class of Certificates; (viii) information as to any Master
Servicer, any Special Servicer (or provision for the appointment thereof) and
the Trustee, as applicable; (ix) information as to the nature and extent of
subordination with respect to any class of Certificates that is subordinate in
right of payment to any other class; and (x) whether such Certificates will be
initially issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement (of which this Prospectus forms a
part) under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Offered Certificates. This Prospectus and the Prospectus
Supplement relating to each Series of Certificates contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement pursuant
to the rules and regulations of the Commission. For further information,
reference is made to such Registration Statement and the exhibits thereto. Such
Registration Statement and exhibits can be inspected and copied at prescribed
rates at the public reference facilities maintained by the Commission at its
Public Reference Section, 450 Fifth Street, N.W, Washington, D.C. 20549, and at
its Regional Offices located as follows: Midwest Regional Office, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661; and Northeast
Regional Office, Seven World Trade Center, Suite 1300, New York, New York
10048. The Commission maintains a Web site at http://www.sec.gov containing
reports, proxy and information statements and other information regarding
registrants, including the Depositor, that file electronically with the
Commission.
To the extent described in the related Prospectus Supplement, some or
all of the Mortgage Loans may be secured by an assignment of the lessors'
(i.e., the related Mortgagors') rights in one or more leases (each, a "Lease")
on the related Mortgaged Property. No Series of Certificates will represent
interests in or obligations of any lessee (each, a "Lessee") under a Lease. If
indicated, however, in the Prospectus Supplement for a given Series, a
significant or the sole source of payments on the Mortgage Loans in such
Series, and, therefore, of distributions on such Certificates, will be rental
payments due from the Lessees under the Leases. Under such circumstances,
prospective investors in the related Series of Certificates may wish to
consider publicly available information, if any, concerning the Lessees.
Reference should be made to the related Prospectus Supplement for information
concerning the Lessees and whether any such Lessees are subject to the periodic
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
A Master Servicer or the Trustee will be required to mail to holders
of Definitive Certificates (as defined herein) of each Series periodic
unaudited reports concerning the related Trust Fund. Unless and until
Definitive Certificates are issued, or to the extent provided in the related
Prospectus Supplement, such reports will be sent on behalf of the related Trust
Fund to Cede & Co. ("Cede"), as nominee of The Depository Trust Company ("DTC")
and registered holder of the Offered Certificates, pursuant to the applicable
Agreement. Such reports may be available to Beneficial Owners (as defined
herein) in the Certificates upon request to their respective DTC
3
<PAGE>
Participants or Indirect Participants (as defined herein). See "Description of
the Certificates -- Reports to Certificateholders" and "Description of the
Agreements -- Evidence as to Compliance."
The Depositor will file or cause to be filed with the Commission such
periodic reports with respect to each Trust Fund as are required under the
Exchange Act, and the rules and regulations of the Commission thereunder. The
Depositor intends to make a written request to the staff of the Commission that
the staff either (i) issue an order pursuant to Section 12(h) of the Exchange
Act exempting the Depositor from certain reporting requirements under the
Exchange Act with respect to each Trust Fund or (ii) state that the staff will
not recommend that the Commission take enforcement action if the Depositor
fulfills its reporting obligations as described in its written request. If such
request is granted, the Depositor will file or cause to be filed with the
Commission as to each Trust Fund the periodic unaudited reports to holders of
the Offered Certificates referenced in the preceding paragraph; however,
because of the nature of the Trust Funds, it is unlikely that any significant
additional information will be filed. In addition, because of the limited
number of Certificateholders expected for each series, the Depositor
anticipates that a significant portion of such reporting requirements will be
permanently suspended following the first fiscal year for the related Trust
Fund.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the
termination of an offering of Offered Certificates evidencing interests
therein. The Depositor will provide or cause to be provided without charge to
each person to whom this Prospectus is delivered in connection with the
offering of one or more classes of Offered Certificates, upon written or oral
request of such person, a copy of any or all documents or reports incorporated
herein by reference, in each case to the extent such documents or reports
relate to one or more of such classes of such Offered Certificates, other than
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to Heller Financial Commercial Mortgage Asset Corp., 500
West Monroe Street, Chicago, Illinois 60661, Attention: Margaret E. Govern. The
Depositor has determined that its financial statements are not material to the
offering of any Offered Certificates.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SUMMARY OF PROSPECTUS.............................................................................................8
RISK FACTORS.....................................................................................................17
DESCRIPTION OF THE TRUST FUNDS...................................................................................24
GENERAL..........................................................................................................24
YIELD CONSIDERATIONS.............................................................................................30
THE DEPOSITOR....................................................................................................34
DESCRIPTION OF THE CERTIFICATES..................................................................................34
DISTRIBUTIONS....................................................................................................34
AVAILABLE DISTRIBUTION AMOUNT....................................................................................35
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES....................................................................35
DISTRIBUTIONS OF PRINCIPAL CERTIFICATES..........................................................................36
COMPONENTS.......................................................................................................36
DISTRIBUTIONS ON THE CERTIFICATES OF PREPAYMENT PREMIUMS OR IN RESPECT OF EQUITY PARTICIPATIONS..................37
ALLOCATION OF LOSSES AND SHORTFALLS..............................................................................37
ADVANCES IN RESPECT OF DELINQUENCIES.............................................................................37
REPORTS TO CERTIFICATEHOLDERS....................................................................................38
TERMINATION......................................................................................................40
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES..............................................................40
DESCRIPTION OF THE AGREEMENTS....................................................................................43
ASSIGNMENT OF ASSETS, REPURCHASES................................................................................43
REPRESENTATIONS AND WARRANTIES, REPURCHASES......................................................................44
ACCOUNTS.........................................................................................................46
DEPOSITS.........................................................................................................46
DISTRIBUTION ACCOUNT.............................................................................................48
OTHER COLLECTION ACCOUNTS........................................................................................48
COLLECTION AND OTHER SERVICING PROCEDURES........................................................................48
SUB-SERVICERS....................................................................................................49
SPECIAL SERVICER.................................................................................................49
HAZARD INSURANCE POLICIES........................................................................................52
RENTAL INTERRUPTION INSURANCE POLICY.............................................................................52
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE................................................................53
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS....................................................................53
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES................................................53
EVIDENCE AS TO COMPLIANCE........................................................................................54
CERTAIN MATTERS REGARDING EACH SERVICER AND THE DEPOSITOR........................................................54
EVENTS OF DEFAULT................................................................................................55
RIGHTS UPON EVENT OF DEFAULT.....................................................................................55
AMENDMENT........................................................................................................56
THE TRUSTEE......................................................................................................56
DUTIES OF THE TRUSTEE............................................................................................57
CERTAIN MATTERS REGARDING THE TRUSTEE............................................................................57
RESIGNATION AND REMOVAL OF THE TRUSTEE...........................................................................57
5
<PAGE>
<CAPTION>
<S> <C>
DESCRIPTION OF CREDIT SUPPORT....................................................................................57
SUBORDINATE CERTIFICATES.........................................................................................58
CROSS-SUPPORT PROVISIONS.........................................................................................58
INSURANCE OR GUARANTEES WITH RESPECT TO THE WHOLE LOANS..........................................................58
LETTER OF CREDIT.................................................................................................59
INSURANCE POLICIES AND SURETY BONDS..............................................................................59
RESERVE FUNDS....................................................................................................59
CREDIT SUPPORT WITH RESPECT TO CMBS..............................................................................60
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND THE LEASES.......................................................60
TYPES OF MORTGAGE INSTRUMENTS....................................................................................60
INTEREST IN REAL PROPERTY........................................................................................61
LEASES AND RENTS.................................................................................................61
PERSONALTY.......................................................................................................61
COOPERATIVE LOANS................................................................................................62
FORECLOSURE......................................................................................................62
BANKRUPTCY LAWS..................................................................................................67
ENVIRONMENTAL LEGISLATION........................................................................................70
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE...............................................................................72
SUBORDINATE FINANCING............................................................................................73
DEFAULT INTEREST, PREPAYMENT CHARGES AND PREPAYMENTS.............................................................73
ACCELERATION ON DEFAULT..........................................................................................73
APPLICABILITY OF USURY LAWS......................................................................................73
CERTAIN LAWS AND REGULATIONS; TYPES OF MORTGAGED PROPERTIES......................................................74
AMERICANS WITH DISABILITIES ACT..................................................................................74
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940..................................................................75
FORFEITURES IN DRUG AND RICO PROCEEDINGS.........................................................................75
FEDERAL INCOME TAX CONSEQUENCES..................................................................................75
GRANTOR TRUST FUNDS..............................................................................................76
SINGLE CLASS OF GRANTOR TRUST CERTIFICATES.......................................................................76
MULTIPLE CLASSES OF GRANTOR TRUST CERTIFICATES...................................................................79
SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE..................................................................82
NON-U.S. PERSONS.................................................................................................83
INFORMATION REPORTING AND BACKUP WITHHOLDING.....................................................................84
REMICS...........................................................................................................85
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES.................................................................86
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES................................................................94
PROHIBITED TRANSACTIONS AND OTHER TAXES..........................................................................98
LIQUIDATION AND TERMINATION......................................................................................99
ADMINISTRATIVE MATTERS...........................................................................................99
TAX-EXEMPT INVESTORS.............................................................................................99
RESIDUAL CERTIFICATE PAYMENTS TO NON-U.S. PERSONS................................................................99
TAX-RELATED RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATE.............................................100
STATE TAX CONSIDERATIONS........................................................................................102
ERISA...........................................................................................................103
PROHIBITED TRANSACTIONS.........................................................................................103
REVIEW BY PLAN FIDUCIARIES......................................................................................104
LEGAL INVESTMENT................................................................................................104
6
<PAGE>
<CAPTION>
<S> <C>
METHOD OF DISTRIBUTION..........................................................................................106
LEGAL MATTERS...................................................................................................117
FINANCIAL INFORMATION...........................................................................................117
RATING..........................................................................................................117
</TABLE>
7
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in
its entirety by reference to the more detailed information appearing elsewhere
in this Prospectus and by reference to the information with respect to each
Series of Certificates contained in the Prospectus Supplement to be prepared
and delivered in connection with the offering of such "Series." An Index of
Principal Definitions is included at the end of this Prospectus.
Title of Certificates.......................... Mortgage Pass-Through
Certificates, issuable in
Series (the "Certificates").
Depositor...................................... Heller Financial Commercial
Mortgage Asset Corp. (the
"Depositor"). See "The
Depositor."
Master Servicer................................ The master servicer (the
"Master Servicer"), if any, for
each Series of Certificates,
which may be an affiliate of
the Depositor, will be named in
the related Prospectus
Supplement. See "Description of
the Agreements -- Collection
and Other Servicing
Procedures."
Special Servicer............................... The special servicer (the
"Special Servicer"), if any,
for each Series of
Certificates, which may be an
affiliate of the Depositor,
will be named, or the
circumstances in accordance
with which a Special Servicer
will be appointed will be
described, in the related
Prospectus Supplement. See
"Description of the Agreements
-- Special Servicers."
Trustee........................................ The trustee (the "Trustee") for
each Series of Certificates
will be named in the related
Prospectus Supplement. See
"Description of the Agreements
-- The Trustee."
Risk Factors................................... Prospective investors should
review the information
appearing under the caption
"Risk Factors" beginning on
page 17 herein and such
information as may be set forth
under the caption "Risk
Factors" in the related
Prospectus Supplement before
purchasing any Offered
Certificate.
The Trust Assets............................... Each Series of Certificates
will represent in the aggregate
the entire beneficial ownership
interest in a Trust Fund
consisting of:
(a) Mortgage Assets............................ The Mortgage Assets with
respect to each Series of
Certificates will consist of a
pool of multifamily and/or
commercial mortgage loans
(collectively, the "Mortgage
Loans") and/or mortgage
participations, mortgage
pass-through certificates or
other mortgage- backed
securities evidencing interests
in or secured by Mortgage Loans
(collectively, the "CMBS") or a
combination of Mortgage Loans
and CMBS. The Mortgage Loans
will not be guaranteed or
insured by the Depositor or any
of its affiliates or, unless
otherwise provided in the
Prospectus Supplement, by any
governmental agency or
<PAGE>
instrumentality or other
person. The CMBS may be
guaranteed or insured by an
affiliate of the Depositor, the
Federal Home Loan Mortgage
8
<PAGE>
Corporation, the Federal
National Mortgage Association,
the Government National
Mortgage Association, or any
other person specified in the
related Prospectus Supplement.
As more specifically described
herein, the Mortgage Loans will
be secured by first or junior
liens on, or security interests
in, properties consisting of
(i) residential properties
consisting of five or more
rental or cooperatively owned
dwelling units (the
"Multifamily Properties") or
(ii) office buildings, retail
properties (including
single-tenant retail
properties), hotels or motels,
health care-related facilities,
industrial properties,
mini-warehouse facilities or
self-storage facilities,
manufactured housing
communities, mixed use or other
types of commercial properties
(the "Commercial Properties").
The term "Mortgaged Properties"
shall refer to Multifamily
Properties or Commercial
Properties, or both.
To the extent described in the
related Prospectus Supplement,
some or all of the Mortgage
Loans may also be secured by an
assignment of one or more
leases (each, a "Lease") of one
or more lessees (each, a
"Lessee") of all or a portion
of the related Mortgaged
Properties. To the extent
specified in the related
Prospectus Supplement, a
significant or the sole source
of payments on certain
Commercial Loans (as defined
herein) will be the rental
payments due under the related
Leases. In certain
circumstances, with respect to
Commercial Properties, the
material terms and conditions
of the related Leases may be
set forth in the related
Prospectus Supplement. See
"Description of the Trust Funds
-- Mortgage Loans -- Leases"
and "Risk Factors -- Limited
Assets" herein.
The Mortgaged Properties may be
located in the United States or
its territories. All Mortgage
Loans will have individual
principal balances at
origination of not less than
$100,000 and original terms to
maturity of not more than 40
years. All Mortgage Loans will
have been originated by persons
other than the Depositor
(including affiliates of the
Depositor), and all Mortgage
Assets will have been
purchased, either directly or
indirectly, by the Depositor on
or before the date of initial
issuance of the related Series
of Certificates. The related
Prospectus Supplement will
indicate if any such persons
are affiliates of the
Depositor.
Each Mortgage Loan may provide
for no accrual of interest or
for accrual of interest thereon
at an interest rate (a
"Mortgage Interest Rate") that
is fixed over its term or that
adjusts from time to time, or
is partially fixed and
partially floating or that may
be converted from a floating to
a fixed Mortgage Interest Rate,
or from a fixed to a floating
Mortgage Interest Rate, from
time to time at the Mortgagor's
election, in each case as
described in the related
Prospectus Supplement. The
floating Mortgage Interest
Rates on the Mortgage Loans in
a Trust Fund may be based on
one or more indices. Each
Mortgage Loan may provide for
scheduled payments to maturity,
payments that adjust from time
to time to accommodate
9
<PAGE>
changes in the Mortgage
Interest Rate or to reflect the
occurrence of certain events,
and may provide for negative
amortization or accelerated
amortization, in each case as
described in the related
Prospectus Supplement. Each
Mortgage Loan may be fully
amortizing or require a balloon
payment due on its stated
maturity date, in each case as
described in the related
Prospectus Supplement. Each
Mortgage Loan may contain
prohibitions on prepayment or
require payment of a premium or
a yield maintenance penalty in
connection with a prepayment,
in each case as described in
the related Prospectus
Supplement. The Mortgage Loans
may provide for payments of
principal, interest or both, on
due dates that occur monthly,
quarterly, semi-annually or at
such other interval as is
specified in the related
Prospectus Supplement. See
"Description of the Trust Funds
-- Assets."
(b) Collection Accounts........................ Each Trust Fund will include
one or more accounts
established and maintained on
behalf of the
Certificateholders into which
the person or persons
designated in the related
Prospectus Supplement will, to
the extent described herein and
in such Prospectus Supplement,
deposit all payments and
collections received or
advanced with respect to the
Mortgage Assets and other
assets in the Trust Fund. Such
an account may be maintained as
an interest bearing or a
non-interest bearing account,
and funds held therein may be
held as cash or invested in
certain short-term, investment
grade obligations, in each case
as described in the related
Prospectus Supplement. See
"Description of the Agreements
-- Distribution Account and
Other Collection Accounts."
(c) Credit Support............................. If so provided in the related
Prospectus Supplement, partial
or full protection against
certain defaults and losses on
the Mortgage Assets in the
related Trust Fund may be
provided to one or more classes
of Certificates of the related
Series in the form of
subordination of one or more
other classes of Certificates
of such Series, which other
classes may include one or more
classes of Offered
Certificates, or by one or more
other types of credit support,
such as a letter of credit,
insurance policy, guarantee,
reserve fund or another type of
credit support, or a
combination thereof (any such
coverage with respect to the
Certificates of any Series,
"Credit Support"). The amount
and types of coverage, the
identification of the entity
providing the coverage (if
applicable) and related
information with respect to
each type of Credit Support, if
any, will be described in the
Prospectus Supplement for a
Series of Certificates. The
Prospectus Supplement for any
Series of Certificates
evidencing an interest in a
Trust Fund that includes CMBS
will describe any similar forms
of credit support that are
provided by or with respect to,
or are included as part of the
trust fund evidenced by or
providing security for, such
CMBS. See "Risk Factors --
Credit Support Limitations" and
"Description of Credit
Support."
10
<PAGE>
(d) Cash Flow Agreement........................ If so provided in the related
Prospectus Supplement, the
Trust Fund may include
guaranteed investment contracts
pursuant to which moneys held
in the funds and accounts
established for the related
Series will be invested at a
specified rate. The Trust Fund
may also include certain other
agreements, such as interest
rate exchange agreements,
interest rate cap or floor
agreements, currency exchange
agreements or similar
agreements provided to reduce
the effects of interest rate or
currency exchange rate
fluctuations on the Mortgage
Assets of one or more classes
of Certificates. The principal
terms of any such guaranteed
investment contract or other
agreement (any such agreement,
a "Cash Flow Agreement"),
including, without limitation,
provisions relating to the
timing, manner and amount of
payments thereunder and
provisions relating to the
termination thereof, will be
described in the Prospectus
Supplement for the related
Series. In addition, the
related Prospectus Supplement
will provide certain
information with respect to the
obligor under any such Cash
Flow Agreement. The Prospectus
Supplement for any Series of
Certificates evidencing an
interest in a Trust Fund that
includes CMBS will describe any
cash flow agreements that are
included as part of the trust
fund evidenced by or providing
security for such CMBS. See
"Description of the Trust Funds
-- Cash Flow Agreements."
Description of Certificates.................... Each Series of Certificates
evidencing an interest in a
Trust Fund that includes
Mortgage Loans as part of its
assets will be issued pursuant
to a pooling and servicing
agreement, and each Series of
Certificates evidencing an
interest in a Trust Fund that
does not include Mortgage Loans
will be issued pursuant to a
trust agreement. To the extent
specified in the Prospectus
Supplement, the Mortgage Loans
shall be serviced pursuant to a
pooling and servicing
agreement. Pooling and
servicing agreements and trust
agreements are referred to
herein as the "Agreements".
Each Series of Certificates
will include one or more
classes. Each Series of
Certificates (including any
class or classes of
Certificates of such Series not
offered hereby) will represent
in the aggregate the entire
beneficial ownership interest
in the Trust Fund. Each class
of Certificates (other than
certain Stripped Interest
Certificates, as defined below)
will have a stated principal
amount (a "Certificate
Balance") and (other than
certain Stripped Principal
Certificates, as defined
below), will accrue interest
thereon based on a fixed,
variable or floating interest
rate (a "Pass-Through Rate").
The related Prospectus
Supplement will specify the
Certificate Balance, if any,
and the Pass-Through Rate, if
any, for each class of
Certificates or, in the case of
a variable or floating
Pass-Through Rate, the method
for determining the
Pass-Through Rate.
Distributions on Certificates.................. Each Series of Certificates
will consist of one or more
classes of Certificates that
may (i) provide for the accrual
of interest thereon based on
fixed, variable or floating
rates; (ii) be senior
(collectively, "Senior
Certificates") or subordinate
11
<PAGE>
(collectively, "Subordinate
Certificates") to one or more
other classes of Certificates
in respect of certain
distributions on the
Certificates; (iii) be entitled
to principal distributions,
with disproportionately low,
nominal or no interest
distributions (collectively,
"Stripped Principal
Certificates"); (iv) be
entitled to interest
distributions, with
disproportionately low, nominal
or no principal distributions
(collectively, "Stripped
Interest Certificates"); (v)
provide for distributions of
accrued interest thereon
commencing only following the
occurrence of certain events,
such as the retirement of one
or more other classes of
Certificates of such Series
(collectively, "Accrual
Certificates"); (vi) provide
for distributions of principal
sequentially, based on
specified payment schedules or
other methodologies; and/or
(vii) provide for distributions
based on a combination of two
or more components thereof with
one or more of the
characteristics described in
this paragraph, including a
Stripped Principal Certificate
component and a Stripped
Interest Certificate component,
to the extent of available
funds, in each case as
described in the related
Prospectus Supplement. Any such
classes may include classes of
Offered Certificates. With
respect to Certificates with
two or more components,
references herein to
Certificate Balance, notional
amount and Pass-Through Rate
refer to the principal balance,
if any, notional amount, if
any, and the Pass-Through Rate,
if any, for any such component.
The Certificates will not be
guaranteed or insured by the
Depositor or any of its
affiliates, by any governmental
agency or instrumentality or by
any other person, unless
otherwise provided in the
related Prospectus Supplement.
See "Risk Factors -- Limited
Assets" and "Description of the
Certificates."
(a) Interest................................... Interest on each class of
Offered Certificates (other
than Stripped Principal
Certificates and certain
classes of Stripped Interest
Certificates) of each Series
will accrue at the applicable
Pass-Through Rate on the
outstanding Certificate Balance
thereof and will be distributed
to Certificateholders as
provided in the related
Prospectus Supplement (each of
the specified dates on which
distributions are to be made, a
"Distribution Date").
Distributions with respect to
interest on Stripped Interest
Certificates may be made on
each Distribution Date on the
basis of a notional amount as
described in the related
Prospectus Supplement.
Distributions of interest with
respect to one or more classes
of Certificates may be reduced
to the extent of certain
delinquencies, losses,
prepayment interest shortfalls,
and other contingencies
described herein and in the
related Prospectus Supplement.
Stripped Principal Certificates
with no stated Pass-Through
Rate will not accrue interest.
See "Risk Factors --
Prepayments and Effect on
Average Life of Certificates
and Yields," "Yield
Considerations" and
"Description of the
Certificates -- Distributions
of Interest on the
Certificates."
12
<PAGE>
(b) Principal.................................. The Certificates of each Series
initially will have an
aggregate Certificate Balance
no greater than the outstanding
principal balance of the
Mortgage Assets as of, unless
the related Prospectus
Supplement provides otherwise,
the close of business on the
first day of the month of
formation of the related Trust
Fund (the "Cut-Off Date"),
after application of scheduled
payments due on or before such
date, whether or not received.
The Certificate Balance of a
Certificate outstanding from
time to time represents the
maximum amount that the holder
thereof is then entitled to
receive in respect of principal
from future cash flow on the
assets in the related Trust
Fund. To the extent provided in
the related Prospectus
Supplement, distributions of
principal will be made on each
Distribution Date to the class
or classes of Certificates
entitled thereto until the
Certificate Balances of such
Certificates have been reduced
to zero. To the extent
specified in the related
Prospectus Supplement,
distributions of principal of
any class of Certificates will
be made on a pro rata basis
among all of the Certificates
of such class or by random
selection, as described in the
related Prospectus Supplement
or otherwise established by the
related Trustee. Stripped
Interest Certificates with no
Certificate Balance will not
receive distributions in
respect of principal. See
"Description of the
Certificates -- Distributions
of Principal of the
Certificates."
Advances....................................... To the extent provided in the
related Prospectus Supplement,
the Special Servicer or the
Master Servicer (each, a
"Servicer") will be obligated
as part of its servicing
responsibilities to make
certain advances with respect
to delinquent scheduled
payments on the Whole Loans in
such Trust Fund which it deems
recoverable. Any such advances
will be made under and subject
to any determinations or
conditions set forth in the
related Prospectus Supplement.
Neither the Depositor nor any
of its affiliates will have any
responsibility to make such
advances. Advances made by a
Master Servicer are
reimbursable generally from
subsequent recoveries in
respect of such Whole Loans and
otherwise to the extent
described herein and in the
related Prospectus Supplement.
If and to the extent provided
in the Prospectus Supplement
for any Series, each Servicer
will be entitled to receive
interest on its outstanding
advances, payable from amounts
in the related Trust Fund. The
Prospectus Supplement for any
Series of Certificates
evidencing an interest in a
Trust Fund that includes CMBS
will describe any corresponding
advancing obligation of any
person in connection with such
CMBS. See "Description of the
Certificates -- Advances in
Respect of Delinquencies."
Termination.................................... If so specified in the related
Prospectus Supplement, a Series
of Certificates may be subject
to optional early termination
through the repurchase of the
Mortgage Assets in the related
Trust Fund by the party
specified therein, under the
circumstances and in the manner
set forth therein. If so
13
<PAGE>
provided in the related
Prospectus Supplement, upon the
reduction of the Certificate
Balance of a specified class or
classes of Certificates to a
specified percentage or amount
(not to exceed 10% of the
principal balance of the
remaining Mortgage Assets) or
on and after a date specified
in such Prospectus Supplement,
the party specified therein
will solicit bids for the
purchase of all of the Mortgage
Assets of the Trust Fund, or of
a sufficient portion of such
Mortgage Assets to retire such
class or classes, or purchase
such Mortgage Assets at a price
set forth in the related
Prospectus Supplement. In
addition, if so provided in the
related Prospectus Supplement,
certain classes of Certificates
may be purchased subject to
similar conditions. See
"Description of the
Certificates -- Termination."
Registration of Certificates................... If so provided in the related
Prospectus Supplement, one or
more classes of the Offered
Certificates will initially be
represented by one or more
Certificates registered in the
name of Cede & Co., as the
nominee of DTC. No person
acquiring an interest in
Offered Certificates so
registered will be entitled to
receive a definitive
certificate representing such
person's interest except in the
event that definitive
certificates are issued under
the limited circumstances
described herein. See "Risk
Factors -- Book-Entry
Registration" and "Description
of the Certificates --
Book-Entry Registration and
Definitive Certificates."
Tax Status of the Certificates................. The Certificates of each Series
will constitute either (i)
"regular interests" ("REMIC
Regular Certificates") and a
single class of "residual
interests" ("REMIC Residual
Certificates") in a Trust Fund
or a portion of a Trust Fund
that is treated as a real
estate mortgage investment
conduit ("REMIC") under
Sections 860A through 860G of
the Internal Revenue Code of
1986, as amended (the "Code"),
or (ii) interests ("Grantor
Trust Certificates") in a Trust
Fund treated as a grantor trust
under applicable provisions of
the Code in a Trust Fund or
portion of a Trust Fund.
Additionally, the Trust Fund
may elect to be treated as a
partnership (the "Partnership")
or, if the Trust Fund has only
one ownership interest, as a
branch of the sole owner of the
Trust Fund's assets for federal
income tax purposes, in which
case the Certificates of such
Series will consist of debt
securities issued by the
partnership (or sole owner)
(the "Notes") and partnership
interests ("Partnership
Interest") in the Partnership
(or the ownership interest in
the Trust Fund).
(a) REMIC...................................... REMIC Regular Certificates
generally will be treated as
debt obligations of the
applicable REMIC for federal
income tax purposes. Certain
REMIC Regular Certificates may
be issued
14
<PAGE>
with original issue discount
for federal income tax
purposes. See "Federal Income
Tax Consequences--REMICs"
herein and in the related
Prospectus Supplement.
The Offered Certificates will
be treated as (i) assets
described in section
7701(a)(19)(C) of the Code and
(ii) "real estate assets"
within the meaning of section
856(c)(5)(B) of the Code, in
each case to the extent
described herein and in the
related Prospectus Supplement.
See "Federal Income Tax
Consequences--REMICs" herein
and in the related Prospectus
Supplement.
(b) Grantor Trust.............................. If no election is made to treat
the Trust Fund relating to a
Series of Certificates as a
REMIC, a partnership or a
branch of the Depositor, the
Trust Fund will be classified
as a grantor trust and not as
an association taxable as a
corporation for federal income
tax purposes, and therefore
holders of Certificates will be
treated as the owners of
undivided pro rata interests in
the Mortgage Pool or pool of
securities and any other assets
held by the Trust Fund. See
"Federal Income Tax
Consequences--Grantors Trust"
herein and in the related
Prospectus Supplement.
(c) Partnership................................ The Trust may elect to be
treated for federal income tax
purposes as a partnership (the
"Trust Partnership") or as a
branch of the Depositor. The
material federal income tax
consequences of either such
election and of ownership of
Certificates of the related
Series will be described in the
Prospectus Supplement.
Investors are urged to consult
their tax advisors and to
review "Federal Income Tax
Consequences" herein and in the
related Prospectus Supplement.
15
<PAGE>
ERISA Considerations........................... A fiduciary of an employee
benefit plan and certain other
retirement plans and
arrangements, including
individual retirement accounts,
annuities, Keogh plans, and
collective investment funds and
separate accounts in which such
plans, accounts, annuities or
arrangements are invested and
any entity whose underlying
assets include assets of such a
plan by reason of any such
plan's investment in the
entity, that is subject to the
Employee Retirement Income
Security Act of 1974, as
amended ("ERISA"), or Section
4975 of the Code should
carefully review with its legal
advisors whether the purchase
or holding of Offered
Certificates could give rise to
a transaction that is
prohibited or is not otherwise
permissible either under ERISA
or Section 4975 of the Code.
See "ERISA Considerations"
herein and in the related
Prospectus Supplement. Certain
classes of Certificates may not
be transferred unless the
Trustee and the Depositor are
furnished with a letter of
representations or an opinion
of counsel to the effect that
such transfer will not result
in a violation of the
prohibited transaction
provisions of ERISA and the
Code and will not subject the
Trustee, the Depositor or the
Master Servicer to additional
obligations. See "Description
of the Certificates -- General"
and "ERISA Considerations."
Legal Investment............................... The related Prospectus
Supplement will specify whether
the Offered Certificates will
constitute "mortgage related
securities" for purposes of the
Secondary Mortgage Market
Enhancement Act of 1984.
Investors whose investment
authority is subject to legal
restrictions should consult
their own legal advisors to
determine whether and to what
extent the Offered Certificates
constitute legal investments
for them. See "Legal
Investment" herein and in the
related Prospectus Supplement.
Rating......................................... At the date of issuance, as to
each Series, each class of
Offered Certificates will be
rated not lower than investment
grade by one or more nationally
recognized statistical rating
agencies (each, a "Rating
Agency"). See "Rating" herein
and in the related Prospectus
Supplement.
A security rating is not a
recommendation to buy, sell or
hold securities and may be
subject to revision or
withdrawal at any time by the
assigning rating organization.
16
<PAGE>
RISK FACTORS
Investors should consider, in connection with the purchase of Offered
Certificates, among other things, the following factors and certain other
factors as may be set forth in "Risk Factors" in the related Prospectus
Supplement.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates
of any Series will develop or, if it does develop, that it will provide holders
with liquidity of investment or will continue while Certificates of such Series
remain outstanding. Any such secondary market may provide less liquidity to
investors than any comparable market for securities evidencing interests in
single family mortgage loans. The market value of Certificates will fluctuate
with changes in prevailing rates of interest. Consequently, sale of
Certificates by a holder in any secondary market that may develop may be at a
discount from 100% of their original principal balance or from their purchase
price. Furthermore, secondary market purchasers may look only hereto, to the
related Prospectus Supplement and to the reports to Certificateholders
delivered pursuant to the related Agreement as described herein under the
heading "Description of the Certificates -- Reports to Certificateholders,"
"--Book-Entry Registration and Definitive Certificates" and "Description of the
Agreements -- Evidence as to Compliance" for information concerning the
Certificates. Except to the extent described herein and in the related
Prospectus Supplement, Certificateholders will have no redemption rights and
the Certificates are subject to early retirement only under certain specified
circumstances described herein and in the related Prospectus Supplement. See
"Description of the Certificates -- Termination."
LIMITED ASSETS OF THE TRUST FUND
The Certificates will not represent an interest in or obligation of
the Depositor, any Servicer, or any of their affiliates. The only obligations
with respect to the Certificates or the Mortgage Assets will be the obligations
(if any) of the Depositor (or, if otherwise provided in the related Prospectus
Supplement, the person identified therein as the person making certain
representations and warranties with respect to the Mortgage Loans, as
applicable, the "Warranting Party") pursuant to certain limited representations
and warranties made with respect to the Mortgage Loans. Since certain
representations and warranties with respect to the Mortgage Assets may have
been made and/or assigned in connection with transfers of such Mortgage Assets
prior to the Closing Date, the rights of the Trustee and the Certificateholders
with respect to such representations or warranties will be limited to their
rights as an assignee thereof. Unless otherwise specified in the related
Prospectus Supplement, none of the Depositor, any Servicer or any affiliate
thereof will have any obligation with respect to representations or warranties
made by any other entity. Unless otherwise specified in the related Prospectus
Supplement, neither the Certificates nor the underlying Mortgage Assets will be
guaranteed or insured by any governmental agency or instrumentality, or by the
Depositor, any Servicer or any of their affiliates. Proceeds of the assets
included in the related Trust Fund for each Series of Certificates (including
the Mortgage Assets and any form of credit enhancement) will be the sole source
of payments on the Certificates, and there will be no recourse to the Depositor
or any other entity in the event that such proceeds are insufficient or
otherwise unavailable to make all payments provided for under the Certificates.
Unless otherwise specified in the related Prospectus Supplement, a
Series of Certificates will not have any claim against or security interest in
the Trust Funds for any other Series. If the related Trust Fund is insufficient
to make payments on such Certificates, no other assets will be available for
payment of the deficiency. Additionally, certain amounts remaining in certain
funds or accounts, including the Distribution Account, the Collection Account
and any accounts maintained as Credit Support, may be withdrawn under certain
conditions, as described in the related Prospectus Supplement. In the event of
such withdrawal, such amounts will not be available for future payment of
principal of or interest on the Certificates. If so provided in the Prospectus
Supplement for a Series of Certificates consisting of one or more classes of
Subordinate Certificates, on any Distribution Date in respect of which losses
or shortfalls in collections on the Trust Assets have been incurred, the amount
of such losses or shortfalls will be borne first by one or more classes of the
Subordinate Certificates, and, thereafter, by the remaining classes of
Certificates in the priority and manner and subject to the limitations
specified in such Prospectus Supplement.
17
<PAGE>
PREPAYMENTS AND RISK OF LOWER YIELDS ON CERTIFICATES
Prepayments (including those caused by defaults) on the Mortgage
Assets in any Trust Fund generally will result in a faster rate of principal
payments on one or more classes of the related Certificates than if payments on
such Mortgage Assets were made as scheduled. Thus, the prepayment experience on
the Mortgage Assets may affect the weighted average life of each class of
related Certificates. Any changes in weighted average life may adversely affect
the yield to holders of the Certificates. Prepayments resulting in a shortening
of the weighted average life of a Class of Certificates may be made at a time
of low interest rates when a holder may be unable to reinvest the resulting
payments of principal on its Certificates at a rate comparable to the rate at
which interest is payable on such Certificates, while delays and extensions
resulting in a lengthening of such weighted average life may occur at a time of
high interest rates when a holder may have been able to reinvest principal
payments that would otherwise have been received by it at higher rates. The
rate of principal payments on pools of mortgage loans varies between pools and
from time to time is influenced by a variety of economic, demographic,
geographic, social, tax, legal and other factors. There can be no assurance as
to the rate of prepayment on the Mortgage Assets in any Trust Fund or that the
rate of payments will conform to any model described herein or in any
Prospectus Supplement. If prevailing interest rates fall significantly below
the applicable mortgage interest rates, principal prepayments are likely to be
higher than if prevailing rates remain at or above the rates borne by the
Mortgage Loans underlying or comprising the Mortgage Assets in any Trust Fund.
As a result, the actual maturity of any class of Certificates could occur
significantly earlier than expected. A Series of Certificates may include one
or more classes of Certificates with priorities of payment and, as a result,
yields on other classes of Certificates, including classes of Offered
Certificates, of such Series may be more sensitive to prepayments on Mortgage
Assets. A Series of Certificates may include one or more classes offered at a
significant premium or discount. Yields on such classes of Certificates will be
sensitive, and in some cases extremely sensitive, to prepayments on Mortgage
Assets and, where the amount of interest payable with respect to a class is
disproportionately high, as compared to the amount of principal, as with
certain classes of Stripped Interest Certificates, a holder might, in some
prepayment scenarios, fail to recoup its original investment. A Series of
Certificates may include one or more classes of Certificates, including classes
of Offered Certificates, that provide for distribution of principal thereof
from amounts attributable to interest accrued but not currently distributable
on one or more classes of Accrual Certificates and, as a result, yields on such
Certificates will be sensitive to (a) the provisions of such Accrual
Certificates relating to the timing of distributions of interest thereon and
(b) if such Accrual Certificates accrue interest at a variable or floating
Pass-Through Rate, changes in such rate. See "Yield Considerations" herein and,
if applicable, in the related Prospectus Supplement.
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Certificates will
reflect such Rating Agency's assessment solely of the likelihood that holders
of Certificates of such class will receive payments to which such
Certificateholders are entitled under the related Agreement. Such rating will
not constitute an assessment of the likelihood that principal prepayments
(including those caused by defaults) on the related Mortgage Assets will be
made, the degree to which the rate of such prepayments might differ from that
originally anticipated or the likelihood of early optional termination of the
Series of Certificates. Such rating will not address the possibility that
prepayment at higher or lower rates than anticipated by an investor may cause
such investor to experience a lower than anticipated yield or that an investor
purchasing a Certificate at a significant premium might fail to recoup its
initial investment under certain prepayment scenarios. Each Prospectus
Supplement will identify any payment to which holders of Offered Certificates
of the related Series are entitled that is not covered by the applicable
rating.
The amount, type and nature of credit support, if any, established
with respect to a Series of Certificates will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit support required with
respect to each such class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future
experience nor any assurance that the data derived from a large pool of
mortgage loans accurately predicts the delinquency, foreclosure or loss
experience of any particular pool of Mortgage Assets. No assurance can be given
that values of any Mortgaged Properties have remained or will remain at their
levels on the respective dates of origination of the related Mortgage Loans.
Moreover, there is no assurance that appreciation of
18
<PAGE>
real estate values generally will limit loss experiences on the Mortgaged
Properties. If the commercial or multifamily residential real estate markets
should experience an overall decline in property values such that the
outstanding principal balances of the Mortgage Loans underlying or comprising
the Mortgage Assets in a particular Trust Fund and any secondary financing on
the related Mortgaged Properties become equal to or greater than the value of
the Mortgaged Properties, the rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced by institutional lenders.
In addition, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by Mortgagors of scheduled
payments of principal and interest on the Mortgage Loans and, accordingly, the
rates of delinquencies, foreclosures and losses with respect to any Trust Fund.
To the extent that such losses are not covered by the Credit Support, if any,
described in the related Prospectus Supplement, such losses will be borne, at
least in part, by the holders of one or more classes of the Certificates of the
related Series. See "Description of Credit Support" and "Rating."
DELINQUENCY AND DEFAULT RISKS OF MULTIFAMILY AND COMMERCIAL MORTGAGE LOANS
a. Dependence on Operations. Mortgage loans made with respect to
multifamily or commercial property may entail risks of delinquency and
foreclosure, and risks of loss in the event thereof, that are greater than
similar risks associated with single family property. See "Description of the
Trust Funds -- Assets." The ability of a Mortgagor to repay a loan secured by
an income-producing property typically is dependent primarily upon the
successful operation of such property rather than any independent income or
assets of the Mortgagor; thus, the value of an income-producing property is
directly related to the net operating income derived from such property. In
contrast, the ability of a Mortgagor to repay a single family loan typically is
dependent primarily upon the Mortgagor's household income, rather than the
capacity of the property to produce income; thus, other than in geographical
areas where employment is dependent upon a particular employer or an industry,
the Mortgagor's income tends not to reflect directly the value of such
property. A decline in the net operating income of an income-producing property
will likely affect both the performance of the related loan as well as the
liquidation value of such property, whereas a decline in the income of a
Mortgagor on a single family property will likely affect the performance of the
related loan but may not affect the liquidation value of such property.
Moreover, a decline in the value of a Mortgaged Property will increase the risk
of loss particularly with respect to any related junior Mortgage Loan. See
"--Junior Mortgage Loans."
The performance of a mortgage loan secured by an income-producing
property leased by the Mortgagor to tenants as well as the liquidation value of
such property may be dependent upon the business operated by such tenants in
connection with such property, the creditworthiness of such tenants or both;
the risks associated with such loans may be offset by the number of tenants or,
if applicable, a diversity of types of business operated by such tenants.
b. Nonrecourse Obligations. It is anticipated that a substantial
portion of the Mortgage Loans included in any Trust Fund will be nonrecourse
loans or loans for which recourse may be restricted or unenforceable, as to
which, in the event of Mortgagor default, recourse may be had only against the
specific property and such other assets, if any, as have been pledged to secure
the related Mortgage Loan. With respect to those Mortgage Loans that provide
for recourse against the Mortgagor and its assets generally, there can be no
assurance that such recourse will ensure a recovery in respect of a defaulted
Mortgage Loan greater than the liquidation value of the related Mortgaged
Property.
c. Concentration Risk. The concentration of default, foreclosure and
loss risks in individual Mortgagors or Mortgage Loans in a particular Trust
Fund or the related Mortgaged Properties will generally be greater than for
pools of single family loans both because the Mortgage Assets in a Trust Fund
will generally consist of a smaller number of loans than would a single family
pool of comparable aggregate unpaid principal balance and because of the higher
principal balance of individual Mortgage Loans. Mortgage Assets in a Trust Fund
may consist of only a single or limited number of Mortgage Loans and/or relate
to Leases to only a single Lessee or a limited number of Lessees.
If applicable, certain other legal aspects of the Mortgage Loans for a
Series of Certificates may be described in the related Prospectus Supplement.
In particular, if the Mortgage Assets in a Trust Fund include any Mortgage
Loans secured by Mortgaged Properties located outside the United States, the
related Prospectus Supplement will set forth any material risks arising
therefrom (including political, economic and legal risks) to the extent
applicable. See also "Certain Legal Aspects of the Mortgage Loans and the
Leases" herein.
19
<PAGE>
If so described in the related Prospectus Supplement, each Mortgagor
under a Commercial Loan may be an entity created by the owner or purchaser of
the related Commercial Property solely to own or purchase such property, in
part to isolate the property from the debts and liabilities of such owner or
purchaser. To the extent specified in the related Prospectus Supplement, each
such Commercial Loan will represent a nonrecourse obligation of the related
Mortgagor secured by the lien of the related Mortgage and the related Lease
Assignments. Whether or not such loans are recourse or nonrecourse obligations,
it is not expected that the Mortgagors will have any significant assets other
than the Commercial Properties and the related Leases, which will be pledged to
the Trustee under the related Agreement. Therefore, the payment of amounts due
on any such Commercial Loans, and, consequently, the payment of principal of
and interest on the related Certificates, will depend primarily or solely on
rental payments by the Lessees. Such rental payments will, in turn, depend on
continued occupancy by, and/or the creditworthiness of, such Lessees, which in
either case may be adversely affected by a general economic downturn or an
adverse change in their financial condition. Moreover, to the extent a
Commercial Property was designed for the needs of a specific type of tenant
(e.g., a nursing home, hotel or motel), the value of such property in the event
of a default by the Lessee or the early termination of such Lease may be
adversely affected because of difficulty in re-leasing the property to a
suitable substitute lessee or, if re-leasing to such a substitute is not
possible, because of the cost of altering the property for another more
marketable use. As a result, without the benefit of the Lessee's continued
support of the Commercial Property, and absent significant amortization of the
Commercial Loan, if such loan is foreclosed on and the Commercial Property is
liquidated following a lease default, the net proceeds might be insufficient to
cover the outstanding principal and interest owing on such loan, thereby
increasing the risk that holders of the Certificates will suffer some loss.
CERTAIN MORTGAGE LOANS NOT FULLY AMORTIZING
Certain of the Mortgage Loans as of the Cut-off Date may not be fully
amortizing over their terms to maturity and, thus, will require substantial
principal payments (i.e., balloon payments) at their stated maturity (the
"Balloon Mortgage Loans"). Mortgage Loans with balloon payments involve a
greater degree of risk because the ability of a Mortgagor to make a balloon
payment typically will depend upon its ability either to timely refinance the
loan or to timely sell the related Mortgaged Property. The ability of a
Mortgagor to accomplish either of these goals will be affected by a number of
factors, including the level of available mortgage interest rates at the time
of sale or refinancing, the Mortgagor's equity in the related Mortgaged
Property, the financial condition and operating history of the Mortgagor and
the related Mortgaged Property, tax laws, rent control laws (with respect to
certain Multifamily Properties and manufactured housing communities),
reimbursement rates (with respect to certain nursing homes), renewability of
operating licenses, prevailing general economic conditions and the availability
of credit for commercial or multifamily real properties, as the case may be,
generally.
HYPER-AMORTIZATION LOANS AND INCREASED PREPAYMENT RISK
Certain of the Mortgage Loans (the "Hyper-Amortization Loans") as of
the Cut-Off Date may permit increases in the Mortgage Interest Rate and
principal amortization at a date (the "Hyper-Amortization Date") prior to
stated maturity, creating an incentive for the related borrower to prepay the
loan. Such prepayment may adversely affect the yield to maturity realized by an
investor on its Certificates. It is anticipated that Borrowers of
Hyper-Amortization Loans will prepay such loans on the Hyper-Amortization Date.
See "Yield Considerations" herein and, if applicable, in the related Prospectus
Supplement.
JUNIOR MORTGAGE LOANS AND EFFECT OF SUBORDINATION IN LIQUIDATION
To the extent specified in the related Prospectus Supplement, certain
of the Mortgage Loans may be secured primarily by junior mortgages. In the case
of liquidation, Mortgage Loans secured by junior mortgages are entitled to
satisfaction from proceeds that remain from the sale of the related Mortgaged
Property after the mortgage loans senior to such Mortgage Loans have been
satisfied. If there are not sufficient funds to satisfy such junior Mortgage
Loans and senior mortgage loans, such Mortgage Loans would suffer a loss and,
accordingly, one or more classes of Certificates would bear such loss.
Therefore, any risks of deficiencies associated with first Mortgage Loans will
be greater with respect to junior Mortgage Loans. See "--Risks Associated with
Mortgage Loans and Mortgaged Properties."
20
<PAGE>
OBLIGOR DEFAULT
If so specified in the related Prospectus Supplement, in order to
maximize recoveries on defaulted Whole Loans, a Master Servicer or a Special
Servicer will be permitted (within prescribed parameters) to extend and modify
Whole Loans that are in default or as to which a payment default is imminent,
including in particular with respect to balloon payments. In addition, a Master
Servicer or a Special Servicer may receive a workout fee based on receipts from
or proceeds of such Whole Loans. While any such entity generally will be
required to determine that any such extension or modification is reasonably
likely to produce a greater recovery on a present value basis than liquidation,
there can be no assurance that such flexibility with respect to extensions or
modifications or payment of a workout fee will increase the present value of
receipts from or proceeds of Whole Loans that are in default or as to which a
payment default is imminent. Additionally, if so specified in the related
Prospectus Supplement, certain of the Mortgage Loans included in the Mortgage
Pool for a Series may have been subject to workouts or similar arrangements
following periods of delinquency and default.
MORTGAGOR TYPE AND INCREASED RISK OF LOSS WITH RESPECT TO MORTGAGE LOANS
Mortgage Loans made to partnerships, corporations or other entities
may entail risks of loss from delinquency and foreclosure that are greater than
those of Mortgage Loans made to individuals. The Mortgagor's sophistication and
form of organization may increase the likelihood of protracted litigation or
bankruptcy in default situations.
CREDIT SUPPORT LIMITATIONS
The Prospectus Supplement for a Series of Certificates will describe
any Credit Support in the related Trust Fund, which may include letters of
credit, insurance policies, guarantees, reserve funds or other types of credit
support, or combinations thereof. Use of Credit Support will be subject to the
conditions and limitations described herein and in the related Prospectus
Supplement. Moreover, such Credit Support may not cover all potential losses or
risks; for example, Credit Support may or may not cover fraud or negligence by
a mortgage loan originator or other parties.
A Series of Certificates may include one or more classes of
Subordinate Certificates (which may include Offered Certificates), if so
provided in the related Prospectus Supplement. Although subordination is
intended to reduce the risk to holders of Senior Certificates of delinquent
distributions or ultimate losses, the amount of subordination will be limited
and may decline under certain circumstances. In addition, if principal payments
on one or more classes of Certificates of a Series are made in a specified
order of priority, any limits with respect to the aggregate amount of claims
under any related Credit Support may be exhausted before the principal of the
lower priority classes of Certificates of such Series has been repaid. As a
result, the impact of significant losses and shortfalls on the Trust Assets may
fall primarily upon those classes of Certificates having a lower priority of
payment. Moreover, if a form of Credit Support covers more than one Series of
Certificates (each, a "Covered Trust"), holders of Certificates evidencing an
interest in a Covered Trust will be subject to the risk that such Credit
Support will be exhausted by the claims of other Covered Trusts.
The amount of any applicable Credit Support supporting one or more
classes of Offered Certificates, including the subordination of one or more
classes of Certificates, will be determined on the basis of criteria
established by each Rating Agency rating such classes of Certificates based on
an assumed level of defaults, delinquencies, other losses or other factors.
There can, however, be no assurance that the loss experience on the related
Mortgage Assets will not exceed such assumed levels. See "--Limited Nature of
Ratings," "Description of the Certificates" and "Description of Credit
Support."
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to
periodic reduction in accordance with a schedule or formula. The Master
Servicer may be permitted to reduce, terminate or substitute all or a portion
of the credit enhancement for any Series of Certificates, if the applicable
Rating Agency indicates that the then-current rating thereof will not be
adversely affected. The rating of any Series of Certificates by any applicable
Rating Agency may be lowered following the initial issuance thereof as a result
of the downgrading of the obligations of any applicable credit support
provider, or
21
<PAGE>
as a result of losses on the related Mortgage Assets substantially in excess of
the levels contemplated by such Rating Agency at the time of its initial rating
analysis. None of the Depositor, the Master Servicer or any of their affiliates
will have any obligation to replace or supplement any credit enhancement, or to
take any other action to maintain any rating of any Series of Certificates.
RISK OF NON-ENFORCEABILITY OF CERTAIN MORTGAGE CLAUSES
Mortgages may contain a due-on-sale clause, which permits the lender
to accelerate the maturity of the Mortgage Loan if the Mortgagor sells,
transfers or conveys the related Mortgaged Property or its interest in the
Mortgaged Property. Mortgages may also include a debt-acceleration clause,
which permits the lender to accelerate the debt upon a monetary or non-monetary
default of the Mortgagor. Such clauses are generally enforceable subject to
certain exceptions. The courts of all states will enforce clauses providing for
acceleration in the event of a material payment default. The equity courts of
any state, however, may refuse the foreclosure of a mortgage or deed of trust
when an acceleration of the indebtedness would be inequitable or unjust or the
circumstances would render the acceleration unconscionable.
If so specified in the related Prospectus Supplement, the Mortgage
Loans will be secured by an assignment of leases and rents pursuant to which
the Mortgagor typically assigns its right, title and interest as landlord under
the leases on the related Mortgaged Property and the income derived therefrom
to the lender as further security for the related Mortgage Loan, while
retaining a license to collect rents for so long as there is no default. In the
event the Mortgagor defaults, the license terminates and the lender is entitled
to collect rents. Such assignments are typically not perfected as security
interests prior to actual possession of the cash flows. Some state laws may
require that the lender take possession of the Mortgaged Property and obtain a
judicial appointment of a receiver before becoming entitled to collect the
rents. In addition, if bankruptcy or similar proceedings are commenced by or in
respect of the Mortgagor, the lender's ability to collect the rents may be
adversely affected. See "Certain Legal Aspects of the Mortgage Loans and the
Leases -- Leases and Rents."
ENVIRONMENTAL RISKS
Real property pledged as security for a mortgage loan may be subject
to certain environmental risks. Under the laws of certain states, contamination
of a property may give rise to a lien on the property to assure the costs of
cleanup. In several states, such a lien has priority over the lien of an
existing mortgage against such property. In addition, under the laws of some
states and under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA") a lender may be liable, as an "owner" or
"operator," for costs of addressing releases or threatened releases of
hazardous substances that require remedy at a property, if agents or employees
of the lender have become sufficiently involved in the operations of the
Mortgagor. A lender also risks such liability on foreclosure of the mortgage.
Each Pooling and Servicing Agreement will provide that no Servicer, acting on
behalf of the Trust Fund, may acquire title to a Mortgaged Property securing a
Mortgage Loan or take over its operation unless such Servicer has previously
determined, based upon a report prepared by a person who regularly conducts
environmental audits, that: (i) the Mortgaged Property is in compliance with
applicable environmental laws or, if not, that taking such actions as are
necessary to bring the Mortgaged Property in compliance therewith is likely to
produce a greater recovery on a present value basis, after taking into account
any risks associated therewith, than not taking such actions and (ii) there are
no circumstances present at the Mortgaged Property relating to the use,
management or disposal of any Hazardous Materials (as defined herein) for which
investigation, testing, monitoring, containment, cleanup or remediation could
be required under any federal, state or local law or regulation, or that, if
any Hazardous Materials are present for which such action would be required,
taking such actions with respect to the affected Mortgaged Property is
reasonably likely to produce a greater recovery on a present value basis, after
taking into account any risks associated therewith, than not taking such
actions. Any additional restrictions on acquiring title to a Mortgaged Property
may be set forth in the related Prospectus Supplement. See "Certain Legal
Aspects of the Mortgage Loans and the Leases -- Environmental Legislation."
22
<PAGE>
DELINQUENT AND NON-PERFORMING MORTGAGE LOANS
If so provided in the related Prospectus Supplement, the Trust Fund
for a particular series of Certificates may include Mortgage Loans that are
past due or are non-performing, provided that no Mortgage Loan will be more
than 59 days delinquent and no Trust Fund on the respective Closing Date will
consist of 20% or more of delinquent Mortgage Loans. To the extent described in
the related Prospectus Supplement, the servicing of such Mortgage Loans as to
which a specified number of payments are delinquent will be performed by the
Special Servicer; however, the same entity may act as both Master Servicer and
Special Servicer. Credit Support provided with respect to a particular series
of Certificates may not cover all losses related to such delinquent or
nonperforming Mortgage Loans, and investors should consider the risk that the
inclusion of such Mortgage Loans in the Trust Fund may adversely affect the
rate of defaults and prepayments on the Mortgage Assets in such Trust Fund and
the yield on the Certificates of such series.
ERISA CONSIDERATIONS
Generally, ERISA applies to investments made by employee benefit plans
and transactions involving the assets of such plans. Due to the complexity of
regulations which govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the Offered Certificates of any
Series.
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates will be required to report on
their federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their
receipt of cash payments, as described in "Federal Income Tax Consequences --
REMICs." Accordingly, under certain circumstances, holders of Offered
Certificates that constitute REMIC Residual Certificates may have taxable
income and tax liabilities arising from such investment during a taxable year
in excess of the cash received during such period. Individual holders of REMIC
Residual Certificates may be limited in their ability to deduct servicing fees
and other expenses of the REMIC. In addition, REMIC Residual Certificates are
subject to certain restrictions on transfer. Because of the special tax
treatment of REMIC Residual Certificates, the taxable income arising in a given
year on a REMIC Residual Certificate will not be equal to, and may be
substantially more than, the taxable income associated with investment in a
corporate bond or stripped instrument having similar cash flow characteristics
and pre-tax yield. Therefore, the after-tax yield on the REMIC Residual
Certificate may be significantly less than that of a corporate bond or stripped
instrument having similar cash flow characteristics. Additionally, prospective
purchasers of a REMIC Residual Certificate should be aware that under
applicable Treasury regulations REMIC residual interests cannot be
marked-to-market. See "Federal Income Tax Consequences -- REMICs."
CONTROL MAY BE EXERCISED BY LESS THAN ALL CERTIFICATEHOLDERS
Under certain circumstances, the consent or approval of the holders of
a specified percentage of the aggregate Certificate Balance of all outstanding
Certificates of a Series or a similar means of allocating decision-making under
the related Agreement ("Voting Rights") will be required to direct, and will be
sufficient to bind all Certificateholders of such Series to, certain actions,
including directing the Special Servicer or the Master Servicer with respect to
actions to be taken with respect to certain Mortgage Loans and REO Properties
and amending the related Agreement in certain circumstances. See "Description
of the Agreements -- Events of Default," "--Rights Upon Event of Default" and
"--Amendment."
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more classes of
the Certificates will be initially represented by one or more certificates
registered in the name of Cede, the nominee for DTC, and will not be registered
in the names of the Beneficial Owners or their nominees. Because of this,
unless and until Definitive Certificates are issued, Beneficial Owners will not
be recognized by the Trustee as "Certificateholders" (as that term is to be
used in the related Agreement). Hence, until such time, Beneficial Owners will
be able to exercise the rights
23
<PAGE>
of Certificateholders only indirectly through DTC and its participating
organizations. See "Description of the Certificates -- Book-Entry Registration
and Definitive Certificates."
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund will include (i) one or more
multifamily and/or commercial mortgage loans (the "Mortgage Loans"), (ii)
mortgage participations, pass-through certificates or other mortgage-backed
securities evidencing interests in or secured by one or more Mortgage Loans or
other similar participations, certificates or securities (collectively, the
"CMBS"), or (iii) a combination of Mortgage Loans and CMBS. As used herein,
"Mortgage Loans" refers to both whole Mortgage Loans and Mortgage Loans
underlying CMBS. Mortgage Loans that secure, or interests in which are
evidenced by, CMBS are herein sometimes referred to as "Underlying Mortgage
Loans". Mortgage Loans that are not Underlying Mortgage Loans are sometimes
referred to as "Whole Loans". Any mortgage participations, pass-through
certificates or other asset-backed certificates in which an CMBS evidences an
interest or which secure an CMBS are sometimes referred to herein also as CMBS
or as "Underlying CMBS". Mortgage Loans and CMBS are sometimes referred to
herein as "Mortgage Assets". No CMBS originally issued in a private placement
will be included as an asset of a Trust Fund until the holding period provided
for under Rule 144(k) promulgated under the Securities Act has expired or such
CMBS has been registered under the Securities Act to the extent required under
federal securities law. The Mortgage Assets will not be guaranteed or insured
by Heller Financial Commercial Mortgage Asset Corp. (the "Depositor") or any of
its affiliates or, unless otherwise provided in the related Prospectus
Supplement, by any governmental agency or instrumentality or by any other
person. Each Mortgage Asset will be selected by the Depositor for inclusion in
a Trust Fund from among those purchased, either directly or indirectly, from a
prior holder thereof (an "Asset Seller"), which may be an affiliate of the
Depositor and, with respect to Mortgage Assets, which prior holder may or may
not be the originator of such Mortgage Loan or the issuer of such CMBS. To the
extent specified in the related Prospectus Supplement, the Certificates will be
entitled to payment only from the assets of the related Trust Fund and will not
be entitled to payments in respect of the assets of any other trust fund
established by the Depositor. If specified in the related Prospectus
Supplement, the assets of a Trust Fund will consist of certificates
representing beneficial ownership interests in another trust fund that contains
the Mortgage Assets.
MORTGAGE LOANS
General
The Mortgage Loans will be secured by liens on, or security interests
in, Mortgaged Properties consisting of (i) residential properties consisting of
five or more rental or cooperatively owned dwelling units in high-rise, mid-
rise or garden apartment buildings ("Multifamily Properties" and the related
loans, "Multifamily Loans") or (ii) office buildings, retail properties
(including single-tenant retail properties), hotels or motels, health
care-related facilities, industrial properties, mini-warehouse facilities or
self-storage facilities, manufactured housing communities, mixed use or other
types of commercial properties ("Commercial Properties" and the related loans,
"Commercial Loans") located, to the extent specified in the related Prospectus
Supplement, in any one of the fifty states, the District of Columbia or any
territories of the United States. To the extent specified in the related
Prospectus Supplement, the Mortgage Loans will be secured by first mortgages or
deeds of trust or other similar security instruments creating a first lien on
Mortgaged Property. Multifamily Properties may include mixed commercial and
residential structures and may include apartment buildings owned by private
cooperative housing corporations ("Cooperatives"). The Mortgaged Properties may
include leasehold interests in properties, the title to which is held by third
party lessors. The Prospectus Supplement will specify whether the term of any
such leasehold exceeds the term of the mortgage note by at least ten years.
Each Mortgage Loan will have been originated by a person (the "Originator")
other than the Depositor. The related Prospectus Supplement will indicate if
any Originator is an affiliate of the Depositor. The Mortgage Loans will be
evidenced by promissory notes (the "Mortgage Notes") secured by mortgages or
deeds of trust (the "Mortgages") creating a lien on the Mortgaged Properties.
Mortgage Loans will generally also be secured by an assignment of leases and
rents and/or operating or other cash flow guarantees relating to the Mortgage
Loan.
24
<PAGE>
Leases
To the extent specified in the related Prospectus Supplement, the
Commercial Properties may be leased to Lessees that respectively occupy all or
a portion of such properties. Pursuant to a Lease Assignment, the related
Mortgagor may assign its rights, title and interest as lessor under each Lease
and the income derived therefrom to the related mortgagee, while retaining a
license to collect the rents for so long as there is no default. If the
Mortgagor defaults, the license terminates and the mortgagee or its agent is
entitled to collect the rents from the related Lessee or Lessees for
application to the monetary obligations of the Mortgagor. State law may limit
or restrict the enforcement of the Lease Assignments by a mortgagee until it
takes possession of the related Mortgaged Property and/or a receiver is
appointed. See "Certain Legal Aspects of the Mortgage Loans and the Leases --
Leases and Rents." Alternatively, to the extent specified in the related
Prospectus Supplement, the Mortgagor and the mortgagee may agree that payments
under Leases are to be made directly to a Servicer.
To the extent described in the related Prospectus Supplement, the
Leases may require the Lessees to pay rent that is sufficient in the aggregate
to cover all scheduled payments of principal and interest on the related
Mortgage Loans and, in certain cases, their pro rata share of the operating
expenses, insurance premiums and real estate taxes associated with the
Mortgaged Properties. Certain of the Leases may require the Mortgagor to bear
costs associated with structural repairs and/or the maintenance of the exterior
or other portions of the Mortgaged Property or provide for certain limits on
the aggregate amount of operating expenses, insurance premiums, taxes and other
expenses that the Lessees are required to pay. If so specified in the related
Prospectus Supplement, under certain circumstances the Lessees may be permitted
to set off their rental obligations against the obligations of the Mortgagors
under the Leases. In those cases where payments under the Leases (net of any
operating expenses payable by the Mortgagors) are insufficient to pay all of
the scheduled principal and interest on the related Mortgage Loans, the
Mortgagors must rely on other income or sources (including security deposits)
generated by the related Mortgaged Property to make payments on the related
Mortgage Loan. To the extent specified in the related Prospectus Supplement,
some Commercial Properties may be leased entirely to one Lessee. In such cases,
absent the availability of other funds, the Mortgagor must rely entirely on
rent paid by such Lessee in order for the Mortgagor to pay all of the scheduled
principal and interest on the related Commercial Loan. To the extent specified
in the related Prospectus Supplement, certain of the Leases may expire prior to
the stated maturity of the related Mortgage Loan. In such cases, upon
expiration of the Leases the Mortgagors will have to look to alternative
sources of income, including rent payment by any new Lessees or proceeds from
the sale or refinancing of the Mortgaged Property, to cover the payments of
principal and interest due on such Mortgage Loans unless the Lease is renewed.
As specified in the related Prospectus Supplement, certain of the Leases may
provide that upon the occurrence of a casualty affecting a Mortgaged Property,
the Lessee will have the right to terminate its Lease, unless the Mortgagor, as
lessor, is able to cause the Mortgaged Property to be restored within a
specified period of time. Certain Leases may provide that it is the lessor's
responsibility, while other Leases provide that it is the Lessee's
responsibility, to restore the Mortgaged Property after a casualty to its
original condition. Certain Leases may provide a right of termination to the
related Lessee if a taking of a material or specified percentage of the leased
space in the Mortgaged Property occurs, or if the ingress or egress to the
leased space has been materially impaired.
Default and Loss Considerations with Respect to the Mortgage Loans
Mortgage loans secured by commercial and multifamily properties are
markedly different from owner-occupied single family mortgage loans. The
repayment of loans secured by commercial or multifamily properties is typically
dependent upon the successful operation of such property rather than upon the
liquidation value of the real estate. To the extent specified in the Prospectus
Supplement, the Mortgage Loans will be non-recourse loans, which means that,
absent special facts, the mortgagee may look only to the Net Operating Income
from the property for repayment of the mortgage debt, and not to any other of
the Mortgagor's assets, in the event of the Mortgagor's default. Lenders
typically look to the Debt Service Coverage Ratio of a loan secured by
income-producing property as an important measure of the risk of default on
such a loan. The "Debt Service Coverage Ratio" of a Mortgage Loan at any given
time is the ratio of the Net Operating Income for a twelve-month period to the
annualized scheduled payments on the Mortgage Loan. "Net Operating Income"
means, for any given period, to the extent specified in the related Prospectus
Supplement, the total operating revenues derived from a Mortgaged Property
during such
25
<PAGE>
period, minus the total operating expenses incurred in respect of such
Mortgaged Property during such period other than (i) non-cash items such as
depreciation and amortization, (ii) capital expenditures and (iii) debt service
on loans secured by the Mortgaged Property. The Net Operating Income of a
Mortgaged Property will fluctuate over time and may be sufficient or
insufficient to cover debt service on the related Mortgage Loan at any given
time.
As the primary component of Net Operating Income, rental income (as
well as maintenance payments from tenant- stockholders of a Cooperative) is
subject to the vagaries of the applicable real estate market and/or business
climate. Properties typically leased, occupied or used on a short-term basis,
such as health care-related facilities, hotels and motels, and mini-warehouse
and self-storage facilities, tend to be affected more rapidly by changes in
market or business conditions than do properties leased, occupied or used for
longer periods, such as (typically) retail properties, office buildings and
industrial properties. Commercial Loans may be secured by owner-occupied
Mortgaged Properties or Mortgaged Properties leased to a single tenant.
Accordingly, a decline in the financial condition of the Mortgagor or single
tenant, as applicable, may have a disproportionately greater effect on the Net
Operating Income from such Mortgaged Properties than would be the case with
respect to Mortgaged Properties with multiple tenants.
Changes in the expense components of Net Operating Income due to the
general economic climate or economic conditions in a locality or industry
segment, such as increases in interest rates, real estate and personal property
tax rates and other operating expenses, including energy costs; changes in
governmental rules, regulations and fiscal policies, including environmental
legislation; and acts of God may also affect the risk of default on the related
Mortgage Loan. As may be further described in the related Prospectus
Supplement, in some cases leases of Mortgaged Properties may provide that the
Lessee rather than the Mortgagor, is responsible for payment of some or all of
these expenses; however, because leases are subject to default risks as well
when a tenant's income is insufficient to cover its rent and operating
expenses, the existence of such "net of expense" provisions will only temper,
not eliminate, the impact of expense increases on the performance of the
related Mortgage Loan. See "--Mortgage Loans -- Leases" above.
While the duration of leases and the existence of any "net of expense"
provisions are often viewed as the primary considerations in evaluating the
credit risk of mortgage loans secured by certain income-producing properties,
such risk may be affected equally or to a greater extent by changes in
government regulation of the operator of the property. Examples of the latter
include mortgage loans secured by health care-related facilities, the income
from which and the operating expenses of which are subject to state and/or
federal regulations, such as Medicare and Medicaid, and multifamily properties
and manufactured housing communities, which may be subject to state or local
rent control regulation and, in certain cases, restrictions on changes in use
of the property. Low- and moderate-income housing in particular may be subject
to legal limitations and regulations but, because of such regulations, may also
be less sensitive to fluctuations in market rents generally.
The Debt Service Coverage Ratio should not be relied upon as the sole
measure of the risk of default of any loan, however, since other factors may
outweigh a high Debt Service Coverage Ratio. With respect to a Balloon Mortgage
Loan, for example, the risk of default as a result of the unavailability of a
source of funds to finance the related balloon payment at maturity on terms
comparable to or better than those of such Balloon Mortgage Loans could be
significant even though the related Debt Service Coverage Ratio is high.
The liquidation value of any Mortgaged Property may be adversely
affected by risks generally incident to interests in real property, including
declines in rental or occupancy rates. Lenders generally use the Loan-to-Value
Ratio (defined below) of a mortgage loan as a measure of risk of loss if a
property must be liquidated upon a default by the Mortgagor. Where more than
one of the appraisal methods described in "--Loan-to-Value Ratio" below are
used and create significantly different results, or where a high Loan-to-Value
Ratio accompanies a high Debt Service Coverage Ratio (or vice versa), the
analysis of default and loss risks is even more difficult.
While the Depositor believes that the foregoing considerations are
important factors that generally distinguish the Multifamily and Commercial
Loans from single family mortgage loans and provide insight to the risks
associated with income-producing real estate, there is no assurance that such
factors will in fact have been considered by the Originators of the Multifamily
and Commercial Loans, or that, for any of such Mortgage Loans,
26
<PAGE>
they are complete or relevant. See "Risk Factors -- Risks Associated with
Mortgage Loans and Mortgaged Properties," " --Balloon Payments," " --Junior
Mortgage Loans," " -Obligor Default" and " --Mortgagor Type."
Loan-to-Value Ratio
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio (expressed as a percentage) of the then outstanding principal balance of
the Mortgage Loan to the Value of the related Mortgaged Property. The "Value"
of a Mortgaged Property, other than with respect to Refinance Loans, is
generally the lesser of (a) the appraised value determined in an appraisal
obtained by the originator at origination of such loan and (b) the sales price
for such property. "Refinance Loans" are loans made to refinance existing
loans. To the extent set forth in the related Prospectus Supplement, the Value
of the Mortgaged Property securing a Refinance Loan is the appraised value
thereof determined in an appraisal obtained at the time of origination of the
Refinance Loan. The Value of a Mortgaged Property as of the date of initial
issuance of the related Series of Certificates may be less than the value at
origination and will fluctuate from time to time based upon changes in economic
conditions and the real estate market.
Appraised values of income-producing properties may be based on the
market comparison method (recent resale value of comparable properties at the
date of the appraisal), the cost replacement method (the cost of replacing the
property at such date), the income capitalization method (a projection of value
based upon the property's projected net cash flow), or upon a selection from or
interpolation of the values derived from such methods. Each of these appraisal
methods presents analytical challenges. It is often difficult to find truly
comparable properties that have recently been sold; the replacement cost of a
property may have little to do with its current market value; and income
capitalization is inherently based on inexact projections of income and expense
and the selection of an appropriate capitalization rate.
Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the date of
such Prospectus Supplement and to the extent then applicable and specifically
known to the Depositor, with respect to the Mortgage Loans, including (i) the
aggregate outstanding principal balance and the largest, smallest and average
outstanding principal balance of the Mortgage Loans as of the applicable
Cut-off Date, (ii) the type of property securing the Mortgage Loans (e.g.,
Multifamily Property or Commercial Property and the type of property in each
such category), (iii) the weighted average (by principal balance) of the
original and remaining terms to maturity of the Mortgage Loans, (iv) the
earliest and latest origination date and maturity date of the Mortgage Loans,
(v) the weighted average (by principal balance) of the Loan-to-Value Ratios at
origination of the Mortgage Loans, (vi) the Mortgage Interest Rates or range of
Mortgage Interest Rates and the weighted average Mortgage Interest Rate borne
by the Mortgage Loans, (vii) the state or states in which most of the Mortgaged
Properties are located, (viii) information with respect to the prepayment
provisions, if any, of the Mortgage Loans, (ix) the weighted average Retained
Interest, if any, (x) with respect to Mortgage Loans with floating Mortgage
Interest Rates ("ARM Loans"), the index, the frequency of the adjustment dates,
the highest, lowest and weighted average note margin and pass-through margin,
and the maximum Mortgage Interest Rate or monthly payment variation at the time
of any adjustment thereof and over the life of the ARM Loan and the frequency
of such monthly payment adjustments, (xi) the Debt Service Coverage Ratio
either at origination or as of a more recent date (or both) and (xii)
information regarding the payment characteristics of the Mortgage Loans,
including without limitation balloon payment and other amortization provisions.
The related Prospectus Supplement will also contain certain information
available to the Depositor with respect to the provisions of leases and the
nature of tenants of the Mortgaged Properties and other information referred to
in a general manner under "--Mortgage Loans -- Default and Loss Considerations
with Respect to the Mortgage Loans" above. If specific information respecting
the Mortgage Loans is not known to the Depositor at the time Certificates are
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement, and specific information will be set
forth in a report which will be available to purchasers of the related
Certificates at or before the initial issuance thereof and will be filed as
part of a Current Report on Form 8-K with the Securities and Exchange
Commission within fifteen days after such initial issuance.
Payment Provisions of the Mortgage Loans
27
<PAGE>
To the extent specified in the related Prospectus Supplement, all of
the Mortgage Loans will (i) have individual principal balances at origination
of not less than $100,000, (ii) have original terms to maturity of not more
than 40 years and (iii) provide for payments of principal, interest or both, on
due dates that occur monthly, quarterly or semi-annually or at such other
interval as is specified in the related Prospectus Supplement. Each Mortgage
Loan may provide for no accrual of interest or for accrual of interest thereon
at an interest rate (a "Mortgage Interest Rate") that is fixed over its term or
that adjusts from time to time, or that is partially fixed and partially
floating, or that may be converted from a floating to a fixed Mortgage Interest
Rate, or from a fixed to a floating Mortgage Interest Rate, from time to time
pursuant to an election or as otherwise specified on the related Mortgage Note,
in each case as described in the related Prospectus Supplement. To the extent
specified in the related Prospectus Supplement, the documentation relating to
certain Mortgage Loans, (the "Hyper-Amortization Loans") may provide for
increases in the related Mortgage Interest Rate and principal amortization,
creating an incentive for the related Borrower to prepay the loan. Each
Mortgage Loan may provide for scheduled payments to maturity or payments that
adjust from time to time to accommodate changes in the Mortgage Interest Rate
or to reflect the occurrence of certain events, and may provide for negative
amortization or accelerated amortization, in each case as described in the
related Prospectus Supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each case as
described in the related Prospectus Supplement. To the extent specified in the
related Prospectus Supplement, the documentation relating to certain Mortgage
Loans (the "Hyper-Amortization Loans") may provide for increases in the related
Mortgage Interest Rate and principal amortization, creating an incentive for
the related borrower to prepay the loan. Each Mortgage Loan may contain
prohibitions on prepayment (a "Lock-out Period" and the date of expiration
thereof, a "Lock-out Date") or require payment of a premium or a yield
maintenance penalty (a "Prepayment Premium") in connection with a prepayment,
in each case as described in the related Prospectus Supplement. In the event
that holders of any class or classes of Offered Certificates will be entitled
to all or a portion of any Prepayment Premiums collected in respect of Mortgage
Loans, the related Prospectus Supplement will specify the method or methods by
which any such amounts will be allocated. A Mortgage Loan may also contain
provisions entitling the mortgagee to a share of profits realized from the
operation or disposition of the Mortgaged Property ("Equity Participations"),
as described in the related Prospectus Supplement. In the event that holders of
any class or classes of Offered Certificates will be entitled to all or a
portion of an Equity Participation, the related Prospectus Supplement will
specify the terms and provisions of the Equity Participation and the method or
methods by which distributions in respect thereof will be allocated among such
Certificates. In addition, a Mortgage Loan may contain provisions allowing for
the substitution of certain securities for the Mortgaged Property securing the
related Mortgage Note upon the satisfaction of certain conditions set forth in
the related Pooling and Servicing Agreement.
CMBS
Any CMBS will have been issued pursuant to a participation and
servicing agreement, a pooling and servicing agreement, a trust agreement, an
indenture or similar agreement (an "CMBS Agreement"). A seller (the "CMBS
Issuer") and/or servicer (the "CMBS Servicer") of the underlying Mortgage Loans
(or Underlying CMBS) will have entered into the CMBS Agreement with a trustee
or a custodian under the CMBS Agreement (the "CMBS Trustee"), if any, or with
the original purchaser of the interest in the underlying Mortgage Loans or CMBS
evidenced by the CMBS.
Distributions of any principal or interest, as applicable, will be
made on CMBS on the dates specified in the related Prospectus Supplement. The
CMBS may be issued in one or more classes with characteristics similar to the
classes of Certificates described in this Prospectus. Any principal or interest
distributions will be made on the CMBS by the CMBS Trustee or the CMBS
Servicer. The CMBS Issuer or the CMBS Servicer or another person specified in
the related Prospectus Supplement may have the right or obligation to
repurchase or substitute assets underlying the CMBS after a certain date or
under other circumstances specified in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other forms
of credit support similar to that described for the Certificates under
"Description of Credit Support" may be provided with respect to the CMBS. The
type, characteristics and amount of such credit support, if any, will be a
function of certain characteristics of the Mortgage Loans or Underlying CMBS
evidenced by or securing such CMBS and other factors and generally will
28
<PAGE>
have been established for the CMBS on the basis of requirements of either any
Rating Agency that may have assigned a rating to the CMBS or the initial
purchasers of the CMBS.
The Prospectus Supplement for a Series of Certificates evidencing
interests in Mortgage Assets that include CMBS will specify, to the extent
available, (i) the aggregate approximate initial and outstanding principal
amount or notional amount, as applicable, and type of the CMBS to be included
in the Trust Fund, (ii) the original and remaining term to stated maturity of
the CMBS, if applicable, (iii) whether such CMBS is entitled only to interest
payments, only to principal payments or to both, (iv) the pass-through or bond
rate of the CMBS or formula for determining such rates, if any, (v) the
applicable payment provisions for the CMBS, including, but not limited to, any
priorities, payment schedules and subordination features, (vi) the CMBS Issuer,
CMBS Servicer and CMBS Trustee, as applicable, (vii) certain characteristics of
the credit support, if any, such as subordination, reserve funds, insurance
policies, letters of credit or guarantees relating to the related Underlying
Mortgage Loans, the Underlying CMBS or directly to such CMBS, (viii) the terms
on which the related Underlying Mortgage Loans or Underlying CMBS for such CMBS
or the CMBS may, or are required to, be purchased prior to their maturity, (ix)
the terms on which Mortgage Loans or Underlying CMBS may be substituted for
those originally underlying the CMBS, (x) the servicing fees payable under the
CMBS Agreement, (xi) to the extent available to the Depositor, the type of
information in respect of the Underlying Mortgage Loans described under
"--Mortgage Loans -- Mortgage Loan Information in Prospectus Supplements"
above, and the type of information in respect of the Underlying CMBS described
in this paragraph, (xii) the characteristics of any cash flow agreements that
are included as part of the trust fund evidenced or secured by the CMBS, (xiii)
whether the CMBS is in certificated form, book-entry form or held through a
depository such as The Depository Trust Company or the Participants Trust
Company and (xiv) whether any election will be made to treat all or a portion
of the assets included in the Trust Fund as a REMIC.
ACCOUNTS
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Certificateholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Mortgage Assets and other assets in
the Trust Fund. Such an account may be maintained as an interest bearing or a
non-interest bearing account, and funds held therein may be held as cash or
invested in certain short-term, investment grade obligations, in each case as
described in the related Prospectus Supplement. See "Description of the
Agreements -- Accounts -- Distribution Account" and "--Accounts -- Other
Collection Accounts."
To the extent provided in the related Prospectus Supplement, the
Depositor will establish an account (a "Pre-Funded Account") into which amounts
will be deposited on the related closing date for the purpose of subsequently
purchasing Mortgage Assets, provided that the amounts so deposited to a
Pre-Funded Account in respect of a Trust Fund shall not exceed 25% of the total
assets in the Trust Fund or be invested in such Pre-Funded Account for longer
than six months.
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Trust Assets in the
related Trust Fund may be provided to one or more classes of Certificates in
the related Series in the form of subordination of one or more other classes of
Certificates in such Series or by one or more other types of credit support,
such as a letter of credit, insurance policy, guarantee, reserve fund or
another type of credit support, or a combination thereof (any such coverage
with respect to the Certificates of any Series, "Credit Support"). The amount
and types of coverage, the identification of the entity providing the coverage
(if applicable) and related information with respect to each type of Credit
Support, if any, will be described in the Prospectus Supplement for a Series of
Certificates. See "Risk Factors -- Credit Support Limitations" and "Description
of Credit Support."
29
<PAGE>
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund
may include guaranteed investment contracts pursuant to which moneys held in
the funds and accounts established for the related Series will be invested at a
specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements provided to reduce the
effects of interest rate or currency exchange rate fluctuations on the Mortgage
Assets or on one or more classes of Certificates. The principal terms of any
such guaranteed investment contract or other agreement (any such agreement, a
"Cash Flow Agreement"), including, without limitation, provisions relating to
the timing, manner and amount of payments thereunder and provisions relating to
the termination thereof, will be described in the Prospectus Supplement for the
related Series. In addition, the related Prospectus Supplement will provide
certain information with respect to the obligor under any such Cash Flow
Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will
be applied by the Depositor to the purchase of Trust Assets and to pay for
certain expenses incurred in connection with such purchase of Trust Assets and
sale of Certificates. The Depositor expects to sell the Certificates from time
to time, but the timing and amount of offerings of Certificates will depend on
a number of factors, including the volume of Mortgage Assets acquired by the
Depositor, prevailing interest rates, availability of funds and general market
conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price paid by
the Certificateholder, the Pass-Through Rate of the Certificate, the receipt
and timing of receipt of distributions on the Certificate and the weighted
average life of the Mortgage Assets in the related Trust Fund (which may be
affected by prepayments, defaults, liquidations or repurchases). See "Risk
Factors."
PASS-THROUGH RATE
Certificates of any class within a Series may have fixed, variable or
floating Pass-Through Rates, which may or may not be based upon the interest
rates borne by the Mortgage Assets in the related Trust Fund. The Prospectus
Supplement with respect to any Series of Certificates will specify the
Pass-Through Rate for each class of such Certificates or, in the case of a
variable or floating Pass-Through Rate, the method of determining the
Pass-Through Rate; the effect, if any, of the prepayment of any Mortgage Asset
on the Pass-Through Rate of one or more classes of Certificates; and whether
the distributions of interest on the Certificates of any class will be
dependent, in whole or in part, on the performance of any obligor under a Cash
Flow Agreement.
The effective yield to maturity to each holder of Certificates
entitled to payments of interest may be below that otherwise produced by the
applicable Pass-Through Rate and purchase price of such Certificate because,
while interest may accrue on each Mortgage Asset during a certain period, the
distribution of such interest will be made on a day which may be several days,
weeks or months following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Certificates (or addition to the
Certificate Balance of a class of Accrual Certificates) on a Distribution Date
will include interest accrued during the Interest Accrual Period for such
Distribution Date. As indicated above under "--Pass-Through Rate," if the
Interest Accrual Period ends on a date other than a Distribution Date for the
related Series, the yield realized by the holders of such Certificates may be
lower than the yield that would result if the Interest Accrual Period ended on
such Distribution Date. In addition, if so specified in the related Prospectus
Supplement, interest accrued for an Interest Accrual Period for one or more
classes of Certificates may be calculated on the assumption that distributions
of principal (and additions to the Certificate Balance of Accrual Certificates)
and allocations of losses on the Mortgage Assets may be made on the
30
<PAGE>
first day of the Interest Accrual Period for a Distribution Date and not on
such Distribution Date. Such method would produce a lower effective yield than
if interest were calculated on the basis of the actual principal amount
outstanding during an Interest Accrual Period. The Interest Accrual Period for
any class of Offered Certificates will be described in the related Prospectus
Supplement.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Certificates will be affected by the rate
of principal payments on the Mortgage Assets (including principal prepayments
on Mortgage Loans resulting from voluntary prepayments by the Mortgagors,
insurance proceeds, condemnations and involuntary liquidations). Such payments
may be directly dependent upon the payments on Leases underlying such Mortgage
Loans. The rate at which principal prepayments occur on the Mortgage Loans will
be affected by a variety of factors, including, without limitation, the terms
of the Mortgage Loans, the level of prevailing interest rates, the availability
of mortgage credit and economic, demographic, geographic, tax, legal and other
factors. In general, however, if prevailing interest rates fall significantly
below the Mortgage Interest Rates on the Mortgage Loans comprising or
underlying the Mortgage Assets in a particular Trust Fund, such Mortgage Loans
are likely to be the subject of higher principal prepayments than if prevailing
rates remain at or above the rates borne by such Mortgage Loans. In this
regard, it should be noted that certain Mortgage Assets may consist of Mortgage
Loans with different Mortgage Interest Rates and the stated pass-through or
pay-through interest rate of certain CMBS may be a number of percentage points
higher or lower than certain of the underlying Mortgage Loans. The rate of
principal payments on some or all of the classes of Certificates of a Series
will correspond to the rate of principal payments on the Mortgage Assets in the
related Trust Fund and is likely to be affected by the existence of Lock-out
Periods and Prepayment Premium provisions of the Mortgage Loans underlying or
comprising such Mortgage Assets, and by the extent to which the servicer of any
such Mortgage Loan is able to enforce such provisions. Mortgage Loans with a
Lock-out Period or a Prepayment Premium provision, to the extent enforceable,
generally would be expected to experience a lower rate of principal prepayments
than otherwise identical Mortgage Loans without such provisions, with shorter
Lock-out Periods or with lower Prepayment Premiums.
If the purchaser of a Certificate offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Mortgage Assets,
the actual yield to maturity will be lower than that so calculated. Conversely,
if the purchaser of a Certificate offered at a premium calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is slower than that actually experienced on the Mortgage Assets,
the actual yield to maturity will be lower than that so calculated. In either
case, if so provided in the Prospectus Supplement for a Series of Certificates,
the effect on yield on one or more classes of the Certificates of such Series
of prepayments of the Mortgage Assets in the related Trust Fund may be
mitigated or exacerbated by any provisions for sequential or selective
distribution of principal to such classes.
When a full prepayment is made on a Mortgage Loan, the Mortgagor is
charged interest on the principal amount of the Mortgage Loan so prepaid for
the number of days in the month actually elapsed up to the date of the
prepayment. To the extent specified in the related Prospectus Supplement, the
effect of prepayments in full will be to reduce the amount of interest paid in
the following month to holders of Certificates entitled to payments of interest
because interest on the principal amount of any Mortgage Loan so prepaid will
be paid only to the date of prepayment rather than for a full month. To the
extent specified in the related Prospectus Supplement, a partial prepayment of
principal is applied so as to reduce the outstanding principal balance of the
related Mortgage Loan as of the Due Date in the month in which such partial
prepayment is received. As a result, to the extent specified in the related
Prospectus Supplement, the effect of a partial prepayment on a Mortgage Loan
will be to reduce the amount of interest passed through to holders of
Certificates in the month following the receipt of such partial prepayment by
an amount equal to one month's interest at the applicable Pass-Through Rate on
the prepaid amount.
The timing of changes in the rate of principal payments on the
Mortgage Assets may significantly affect an investor's actual yield to
maturity, even if the average rate of distributions of principal is consistent
with an investor's expectation. In general, the earlier a principal payment is
received on the Mortgage Assets and distributed on a Certificate, the greater
the effect on such investor's yield to maturity. The effect on an investor's
yield of
31
<PAGE>
principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during a given period may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Mortgage
Assets included in or comprising a Trust Fund and the rate at which payments
are made from any Credit Support or Cash Flow Agreement for the related Series
of Certificates may affect the ultimate maturity and the weighted average life
of each class of such Series. Prepayments on the Mortgage Loans comprising or
underlying the Mortgage Assets in a particular Trust Fund will generally
accelerate the rate at which principal is paid on some or all of the classes of
the Certificates of the related Series.
If so provided in the Prospectus Supplement for a Series of
Certificates, one or more classes of Certificates may have a final scheduled
Distribution Date, which is the date on or prior to which the Certificate
Balance thereof is scheduled to be reduced to zero, calculated on the basis of
the assumptions applicable to such Series set forth therein.
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of a
class of Certificates of a Series will be influenced by the rate at which
principal on the Mortgage Loans comprising or underlying the Mortgage Assets is
paid to such class, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes prepayments, in
whole or in part, and liquidations due to default).
In addition, the weighted average life of the Certificates may be
affected by the varying maturities of the Mortgage Loans comprising or
underlying the CMBS. If any Mortgage Loans comprising or underlying the
Mortgage Assets in a particular Trust Fund have actual terms to maturity of
less than those assumed in calculating final scheduled Distribution Dates for
the classes of Certificates of the related Series, one or more classes of such
Certificates may be fully paid prior to their respective final scheduled
Distribution Dates, even in the absence of prepayments. Accordingly, the
prepayment experience of the Mortgage Assets will, to some extent, be a
function of the mix of Mortgage Interest Rates and maturities of the Mortgage
Loans comprising or underlying such Mortgage Assets. See "Description of the
Trust Funds."
Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model. CPR represents a constant assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans for
the life of such loans.
Neither CPR nor any other prepayment model or assumption purports to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans underlying or comprising the Mortgage Assets. Moreover, CPR was developed
based upon historical prepayment experience for single family loans. Thus, it
is likely that prepayment of any Mortgage Loans comprising or underlying the
Mortgage Assets for any Series will not conform to any particular level of CPR.
The Depositor is not aware of any meaningful publicly available
prepayment statistics for multifamily or commercial mortgage loans.
The Prospectus Supplement with respect to each Series of Certificates
will contain tables, if applicable, setting forth the projected weighted
average life of each class of Offered Certificates of such Series and the
percentage of the initial Certificate Balance of each such class that would be
outstanding on specified Distribution Dates based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the
Mortgage Loans comprising or underlying the related Mortgage Assets are made at
rates corresponding to various percentages of CPR or at such other rates
specified in such Prospectus Supplement. Such tables and assumptions are
intended to illustrate the sensitivity of weighted average life of the
Certificates to various prepayment rates and will not be intended to predict or
to provide information that will enable investors to predict
32
<PAGE>
the actual weighted average life of the Certificates. It is unlikely that
prepayment of any Mortgage Loans comprising or underlying the Mortgage Assets
for any Series will conform to any particular level of CPR or any other rate
specified in the related Prospectus Supplement.
OTHER FACTS AFFECTING WEIGHTED AVERAGE LIFE
Type of Mortgage Asset
A number of Mortgage Loans may have balloon payments due at maturity,
and because the ability of a Mortgagor to make a balloon payment typically will
depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a risk that a number of Mortgage Loans having
balloon payments may default at maturity, or that the servicer may extend the
maturity of such a Mortgage Loan in connection with a workout. In the case of
defaults, recovery of proceeds may be delayed by, among other things,
bankruptcy of the Mortgagor or adverse conditions in the market where the
property is located. In order to minimize losses on defaulted Mortgage Loans,
the servicer may, to the extent and under the circumstances set forth in the
related Prospectus Supplement, be permitted to modify Mortgage Loans that are
in default or as to which a payment default is imminent. Any defaulted balloon
payment or modification that extends the maturity of a Mortgage Loan will tend
to extend the weighted average life of the Certificates, thereby lengthening
the period of time elapsed from the date of issuance of a Certificate until it
is retired. Conversely, Mortgage Loans (the "Hyper-Amortization Loans") that
permit increases in the Mortgage Interest Rate and principal amortization at a
date prior to stated maturity (the "Hyper-Amortization Date") create an
incentive for the related borrower to prepay the loan, which will tend to
shorten the weighted average life of the Certificates to the extent an
investor's calculation of the weighted average life of the Certificates does
not assume prepayment of such loans on the related Hyper-Amortization Date.
Foreclosures and Payment Plans
The number of foreclosures and the principal amount of the Mortgage
Loans comprising or underlying the Mortgage Assets that are foreclosed in
relation to the number and principal amount of Mortgage Loans that are repaid
in accordance with their terms will affect the weighted average life of the
Mortgage Loans comprising or underlying the Mortgage Assets and that of the
related Series of Certificates. Servicing decisions made with respect to the
Mortgage Loans, including the use of payment plans prior to a demand for
acceleration and the restructuring of Mortgage Loans in bankruptcy proceedings,
may also have an effect upon the payment patterns of particular Mortgage Loans
and thus the weighted average life of the Certificates.
Due-on-Sale and Due-on-Encumbrance Clauses
Acceleration of mortgage payments as a result of certain transfers of
or the creation of encumbrances upon underlying Mortgaged Property is another
factor affecting prepayment rates that may not be reflected in the prepayment
standards or models used in the relevant Prospectus Supplement. A number of the
Mortgage Loans comprising or underlying the Mortgage Assets may include
"due-on-sale" clauses or "due-on-encumbrance" clauses that allow the holder of
the Mortgage Loans to demand payment in full of the remaining principal balance
of the Mortgage Loans upon sale or certain other transfers of or the creation
of encumbrances upon the related Mortgaged Property. With respect to any Whole
Loans, to the extent provided in the related Prospectus Supplement, the Master
Servicer, on behalf of the Trust Fund, will be required to exercise (or waive
its right to exercise) any such right that the Trustee may have as mortgagee to
accelerate payment of the Whole Loan in a manner consistent with the Servicing
Standard. See "Certain Legal Aspects of the Mortgage Loans and the Leases --
Due-on-Sale and Due-on-Encumbrance" and "Description of the Agreements --
Due-on-Sale and Due-on-Encumbrance Provisions."
Single Mortgage Loan or Single Mortgagor
The Mortgage Assets in a particular Trust Fund may consist of a single
Mortgage Loan or obligations of a single Mortgagor or related Mortgagors as
specified in the related Prospectus Supplement. Assumptions used with respect
to the prepayment standards or models based upon analysis of the behavior of
mortgage loans in a larger
33
<PAGE>
group will not necessarily be relevant in determining prepayment experience on
a single Mortgage Loan or with respect to a single Mortgagor.
THE DEPOSITOR
Heller Financial Commercial Mortgage Asset Corp., the Depositor, is a
direct wholly-owned subsidiary of Heller Financial, Inc. and was incorporated
in the State of Delaware on January 7, 1998. The principal executive offices of
the Depositor are located at 500 West Monroe Street, Chicago, Illinois 60661.
Its telephone number is (312) 441-7000.
The Depositor does not have, nor is it expected in the future to have,
any significant assets.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates of each Series (including any class of Certificates
not offered hereby) will represent the entire beneficial ownership interest in
the Trust Fund created pursuant to the related Agreement. Each Series of
Certificates will consist of one or more classes of Certificates that may (i)
provide for the accrual of interest thereon based on fixed, variable or
floating rates; (ii) be senior (collectively, "Senior Certificates") or
subordinate (collectively, "Subordinate Certificates") to one or more other
classes of Certificates in respect of certain distributions on the
Certificates; (iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions (collectively,
"Stripped Principal Certificates"); (iv) be entitled to interest distributions,
with disproportionately low, nominal or no principal distributions
(collectively, "Stripped Interest Certificates"); (v) provide for distributions
of accrued interest thereon commencing only following the occurrence of certain
events, such as the retirement of one or more other classes of Certificates of
such Series (collectively, "Accrual Certificates"); (vi) provide for payments
of principal sequentially, based on specified payment schedules, from only a
portion of the Trust Assets in such Trust Fund or based on specified
calculations, to the extent of available funds, in each case as described in
the related Prospectus Supplement; and/or (vii) provide for distributions based
on a combination of two or more components thereof with one or more of the
characteristics described in this paragraph including a Stripped Principal
Certificate component and a Stripped Interest Certificate component. Any such
classes may include classes of Offered Certificates.
Each class of Offered Certificates of a Series will be issued in
minimum denominations corresponding to the Certificate Balances or, in case of
Stripped Interest Certificates, notional amounts or percentage interests
specified in the related Prospectus Supplement. The transfer of any Offered
Certificates may be registered and such Certificates may be exchanged without
the payment of any service charge payable in connection with such registration
of transfer or exchange, but the Depositor or the Trustee or any agent thereof
may require payment of a sum sufficient to cover any tax or other governmental
charge. One or more classes of Certificates of a Series may be issued in
definitive form ("Definitive Certificates") or in book-entry form ("Book-Entry
Certificates"), as provided in the related Prospectus Supplement. See "Risk
Factors -- Book-Entry Registration" and "Description of the Certificates --
Book-Entry Registration and Definitive Certificates." Definitive Certificates
will be exchangeable for other Certificates of the same class and Series of a
like aggregate Certificate Balance, notional amount or percentage interest but
of different authorized denominations. See "Risk Factors -- Limited Liquidity"
and "--Limited Assets."
DISTRIBUTIONS
Distributions on the Certificates of each Series will be made by or on
behalf of the Trustee on each Distribution Date as specified in the related
Prospectus Supplement from the Available Distribution Amount for such Series
and such Distribution Date. Except as otherwise specified in the related
Prospectus Supplement, distributions (other than the final distribution) will
be made to the persons in whose names the Certificates are registered at the
close of business on the last business day of the month preceding the month in
which the Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close
34
<PAGE>
of business on the date specified in the related Prospectus Supplement (the
"Determination Date"). All distributions with respect to each class of
Certificates on each Distribution Date will be allocated pro rata among the
outstanding Certificates in such class or by random selection, as described in
the related Prospectus Supplement or otherwise established by the related
Trustee. Payments will be made either by wire transfer in immediately available
funds to the account of a Certificateholder at a bank or other entity having
appropriate facilities therefor, if such Certificateholder has so notified the
Trustee or other person required to make such payments no later than the date
specified in the related Prospectus Supplement (and, if so provided in the
related Prospectus Supplement, holds Certificates in the requisite amount
specified therein), or by check mailed to the address of the person entitled
thereto as it appears on the Certificate Register; provided, however, that the
final distribution in retirement of the Certificates (whether Definitive
Certificates or Book-Entry Certificates) will be made only upon presentation
and surrender of the Certificates at the location specified in the notice to
Certificateholders of such final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Certificates of each Series on each
Distribution Date will be made from the Available Distribution Amount described
below, in accordance with the terms described in the related Prospectus
Supplement. Unless provided otherwise in the related Prospectus Supplement, the
"Available Distribution Amount" for each Distribution Date equals the sum of
the following amounts:
(i) the total amount of all cash on deposit in the related
Distribution Account as of the corresponding Determination Date,
including Servicer advances, net of any scheduled payments due and
payable after such Distribution Date;
(ii) interest or investment income on amounts on deposit in the
Distribution Account, including any net amounts paid under any Cash
Flow Agreements; and
(iii) to the extent not on deposit in the related Distribution Account
as of the corresponding Determination Date, any amounts collected
under, from or in respect of any Credit Support with respect to such
Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Certificates (including any Certificates not
offered hereby) on each Distribution Date, and accordingly will be released
from the Trust Fund and will not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates (other than classes of Stripped Principal
Certificates that have no Pass-Through Rate) may have a different Pass-Through
Rate, which will be a fixed, variable or floating rate at which interest will
accrue on such class or a component thereof (the "Pass-Through Rate"). The
related Prospectus Supplement will specify the Pass-Through Rate for each class
or component or, in the case of a variable or floating Pass-Through Rate, the
method for determining the Pass-Through Rate. To the extent specified in the
related Prospectus Supplement, interest on the Certificates will be calculated
on the basis of a 360-day year consisting of twelve 30-day months.
Distributions of interest in respect of the Certificates of any class
will be made on each Distribution Date (other than any class of Accrual
Certificates, which will be entitled to distributions of accrued interest
commencing only on the Distribution Date, or under the circumstances, specified
in the related Prospectus Supplement, and any class of Stripped Principal
Certificates that are not entitled to any distributions of interest) based on
the Accrued Certificate Interest for such class and such Distribution Date,
subject to the sufficiency of the portion of the Available Distribution Amount
allocable to such class on such Distribution Date. Prior to the time interest
is distributable on any class of Accrual Certificates, the amount of Accrued
Certificate Interest otherwise distributable on such class will be added to the
Certificate Balance thereof on each Distribution Date. With respect to each
class of Certificates and each Distribution Date (other than certain classes of
Stripped Interest Certificates), "Accrued Certificate Interest" will be equal
to interest accrued for a specified period on the outstanding Certificate
Balance thereof immediately prior to the Distribution Date, at the applicable
Pass-Through Rate, reduced as described
35
<PAGE>
below. To the extent provided in the Prospectus Supplement, Accrued Certificate
Interest on Stripped Interest Certificates will be equal to interest accrued
for a specified period on the outstanding notional amount thereof immediately
prior to each Distribution Date, at the applicable Pass-Through Rate, reduced
as described below. The method of determining the notional amount for any class
of Stripped Interest Certificates will be described in the related Prospectus
Supplement. Reference to notional amount is solely for convenience in certain
calculations and does not represent the right to receive any distributions of
principal. The aggregate notional amount of any Class of Stripped Interest
Certificates will generally equal 100% of the aggregate Stated Principal
Balance (as defined in the related Prospectus Supplement) of all Mortgage Loans
outstanding from time to time. To the extent provided in the related Prospectus
Supplement, the Accrued Certificate Interest on a Series of Certificates will
be reduced in the event of prepayment interest shortfalls, which are shortfalls
in collections of interest for a full accrual period resulting from prepayments
prior to the due date in such accrual period on the Mortgage Loans comprising
or underlying the Mortgage Assets in the Trust Fund for such Series. The
particular manner in which such shortfalls are to be allocated among some or
all of the classes of Certificates of that Series will be specified in the
related Prospectus Supplement.
The related Prospectus Supplement will also describe the extent to
which the amount of Accrued Certificate Interest that is otherwise
distributable on (or, in the case of Accrual Certificates, that may otherwise
be added to the Certificate Balance of) a class of Offered Certificates may be
reduced as a result of any other contingencies, including delinquencies, losses
and deferred interest on or in respect of the Mortgage Loans comprising or
underlying the Mortgage Assets in the related Trust Fund. To the extent
provided in the related Prospectus Supplement, any reduction in the amount of
Accrued Certificate Interest otherwise distributable on a class of Certificates
by reason of the allocation to such class of a portion of any deferred interest
on the Mortgage Loans comprising or underlying the Mortgage Assets in the
related Trust Fund will result in a corresponding increase in the Certificate
Balance of such class. See " Risk Factors -- Prepayments and Effect on Average
Life of Certificates and Yields" and "Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL CERTIFICATES
The Certificates of each Series, other than certain classes of
Stripped Interest Certificates, will have a "Certificate Balance" which, at any
time, will equal the then maximum amount that the holder will be entitled to
receive in respect of principal out of the future cash flow on the Mortgage
Assets and other assets included in the related Trust Fund. The outstanding
Certificate Balance of a Certificate will be reduced to the extent of
distributions of principal thereon from time to time and, if and to the extent
so provided in the related Prospectus Supplement, by the amount of losses
incurred in respect of the related Mortgage Assets, may be increased in respect
of deferred interest on the related Mortgage Loans to the extent provided in
the related Prospectus Supplement and, in the case of Accrual Certificates
prior to the Distribution Date on which distributions of interest are required
to commence, will be increased by any related Accrued Certificate Interest. The
initial aggregate Certificate Balance of all classes of Certificates of a
Series will not be greater than the outstanding aggregate principal balance of
the related Mortgage Assets as of the applicable Cut-off Date. The initial
aggregate Certificate Balance of a Series and each class thereof will be
specified in the related Prospectus Supplement. To the extent provided in the
related Prospectus Supplement, distributions of principal will be made on each
Distribution Date to the class or classes of Certificates entitled thereto in
accordance with the provisions described in such Prospectus Supplement until
the Certificate Balance of such class has been reduced to zero. Stripped
Interest Certificates with no Certificate Balance are not entitled to any
distributions of principal.
COMPONENTS
To the extent specified in the related Prospectus Supplement,
distribution on a class of Certificates may be based on a combination of two or
more different components as described under "--General" above. To such extent,
the descriptions set forth under "--Distributions of Interests on the
Certificates" and "--Distributions of Principal of the Certificates" above also
relate to components of such a class of Certificates. In such case, reference
in such sections to Certificate Balance and Pass-Through Rate refer to the
principal balance, if any, of any such component and the Pass- Through Rate, if
any, on any such component, respectively.
36
<PAGE>
DISTRIBUTIONS ON THE CERTIFICATES OF PREPAYMENT PREMIUMS OR IN RESPECT OF EQUITY
PARTICIPATIONS
If so provided in the related Prospectus Supplement, Prepayment
Premiums or payments in respect of Equity Participations that are collected on
the Mortgage Assets in the related Trust Fund will be distributed on each
Distribution Date to the class or classes of Certificates entitled thereto in
accordance with the provisions described in such Prospectus Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a Series of
Certificates consisting of one or more classes of Subordinate Certificates, on
any Distribution Date in respect of which losses or shortfalls in collections
on the Mortgage Assets have been incurred, the amount of such losses or
shortfalls will be borne first by a class of Subordinate Certificates in the
priority and manner and subject to the limitations specified in such Prospectus
Supplement. See "Description of Credit Support" for a description of the types
of protection that may be included in shortfalls on Mortgage Assets comprising
such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any Series of Certificates evidencing an interest in a
Trust Fund, to the extent provided in the related Prospectus Supplement, a
Servicer or another entity described therein will be required as part of its
servicing responsibilities to advance on or before each Distribution Date its
own funds or funds held in the Distribution Account that are not included in
the Available Distribution Amount for such Distribution Date, in an amount
equal to the aggregate of payments of principal (other than any balloon
payments) and interest (net of related servicing fees and Retained Interest)
that were due on the Whole Loans in such Trust Fund and were delinquent on the
related Determination Date, subject to such Servicer's (or another entity's)
good faith determination that such advances will be reimbursable from Related
Proceeds (as defined below). In the case of a Series of Certificates that
includes one or more classes of Subordinate Certificates and if so provided in
the related Prospectus Supplement, each Servicer's (or another entity's)
advance obligation may be limited only to the portion of such delinquencies
necessary to make the required distributions on one or more classes of Senior
Certificates and/or may be subject to such Servicer's (or another entity's)
good faith determination that such advances will be reimbursable not only from
Related Proceeds but also from collections on other Trust Assets otherwise
distributable on one or more classes of such Subordinate Certificates. See
"Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses. To the
extent provided in the related Prospectus Supplement, advances of a Servicer's
(or another entity's) funds will be reimbursable only out of related recoveries
on the Mortgage Loans (including amounts received under any form of Credit
Support) respecting which such advances were made (as to any Mortgage Loan,
"Related Proceeds") and, if so provided in the Prospectus Supplement, out of
any amounts otherwise distributable on one or more classes of Subordinate
Certificates of such Series; provided, however, that any such advance will be
reimbursable from any amounts in the Distribution Account prior to any
distributions being made on the Certificates to the extent that a Servicer (or
such other entity) shall determine in good faith that such advance (a
"Nonrecoverable Advance") is not ultimately recoverable from Related Proceeds
or, if applicable, from collections on other Trust Assets otherwise
distributable on such Subordinate Certificates. If advances have been made by a
Servicer from excess funds in the Distribution Account, such Servicer is
required to replace such funds in the Distribution Account on any future
Distribution Date to the extent that funds in the Distribution Account on such
Distribution Date are less than payments required to be made to
Certificateholders on such date. If so specified in the related Prospectus
Supplement, the obligations of a Servicer (or another entity) to make advances
may be secured by a cash advance reserve fund, a surety bond, a letter of
credit or another form of limited guaranty. If applicable, information
regarding the characteristics of, and the identity of any obligor on, any such
surety bond, will be set forth in the related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement,
a Servicer (or another entity) will be entitled to receive interest at the rate
specified therein on its outstanding advances and will be entitled to pay
itself such interest periodically from general collections on the Trust Assets
prior to any payment to Certificateholders or
37
<PAGE>
as otherwise provided in the related Agreement and described in such Prospectus
Supplement. The Prospectus Supplement for any Series of Certificates evidencing
an interest in a Trust Fund that includes CMBS will describe any corresponding
advancing obligation of any person in connection with such CMBS.
REPORTS TO CERTIFICATEHOLDERS
To the extent provided in the Prospectus Supplement, with each
distribution to holders of any class of Certificates of a Series, the Master
Servicer or the Trustee, as provided in the related Prospectus Supplement, will
forward or cause to be forwarded to each such holder, to the Depositor and to
such other parties as may be specified in the related Agreement, a statement
setting forth, in each case to the extent applicable and available:
(i) the amount of such distribution to holders of Certificates of such
class applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of Certificates of
such class allocable to Accrued Certificate Interest;
(iii) the amount of such distribution allocable to (a) Prepayment
Premiums and (b) payments on account of Equity Participations;
(iv) the amount of related servicing compensation received by each
Servicer and such other customary information as any such Master
Servicer or the Trustee deems necessary or desirable, or that a
Certificateholder reasonably requests, to enable Certificateholders to
prepare their tax returns;
(v) the aggregate amount of advances included in such distribution,
and the aggregate amount of any unreimbursed advances at the close of
business on such Distribution Date;
(vi) the aggregate principal balance of the Mortgage Assets at the
close of business on such Distribution Date;
(vii) the number and aggregate principal balance of Whole Loans in
respect of which (a) one scheduled payment is delinquent, (b) two
scheduled payments are delinquent, (c) three or more scheduled
payments are delinquent and (d) foreclosure proceedings have been
commenced;
(viii) with respect to each Whole Loan that is delinquent two or more
months, (a) the loan number thereof, (b) the unpaid balance thereof,
(c) whether the delinquency is in respect of any balloon payment, (d)
the aggregate amount of unreimbursed servicing expenses and
unreimbursed advances in respect thereof, (e) if applicable, the
aggregate amount of any interest accrued and payable on related
servicing expenses and related advances assuming such Mortgage Loan is
subsequently liquidated through foreclosure, (f) whether a notice of
acceleration has been sent to the Mortgagor and, if so, the date of
such notice, (g) whether foreclosure proceedings have been commenced
and, if so, the date so commenced and (h) if such Mortgage Loan is
more than three months delinquent and foreclosure has not been
commenced, the reason therefor;
(ix) with respect to any Whole Loan liquidated during the related Due
Period (other than by payment in full), (a) the loan number thereof,
(b) the manner in which it was liquidated and (c) the aggregate amount
of liquidation proceeds received;
(x) with respect to any Whole Loan liquidated during the related Due
Period, (a) the portion of such liquidation proceeds payable or
reimbursable to each Servicer (or any other entity) in respect of such
Mortgage Loan and (b) the amount of any loss to Certificateholders;
(xi) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period,
(a) the loan number of the related Mortgage Loan and (b) the date of
acquisition;
38
<PAGE>
(xii) with respect to each REO Property relating to a Whole Loan and
included in the Trust Fund as of the end of the related Due Period,
(a) the book value, (b) the principal balance of the related Mortgage
Loan immediately following such Distribution Date (calculated as if
such Mortgage Loan were still outstanding taking into account certain
limited modifications to the terms thereof specified in the
Agreement), (c) the aggregate amount of unreimbursed servicing
expenses and unreimbursed advances in respect thereof and (d) if
applicable, the aggregate amount of interest accrued and payable on
related servicing expenses and related advances;
(xiii) with respect to any such REO Property sold during the related
Due Period (a) the loan number of the related Mortgage Loan, (b) the
aggregate amount of sale proceeds, (c) the portion of such sales
proceeds payable or reimbursable to each Servicer in respect of such
REO Property or the related Mortgage Loan and (d) the amount of any
loss to Certificateholders in respect of the related Mortgage Loan;
(xiv) the aggregate Certificate Balance or notional amount, as the
case may be, of each class of Certificates (including any class of
Certificates not offered hereby) at the close of business on such
Distribution Date, separately identifying any reduction in such
Certificate Balance due to the allocation of any loss and increase in
the Certificate Balance of a class of Accrual Certificates in the
event that Accrued Certificate Interest has been added to such
balance;
(xv) the aggregate amount of principal prepayments made during the
related Due Period;
(xvi) the aggregate Accrued Certificate Interest and unpaid Accrued
Certificate Interest, if any, on each class of Certificates at the
close of business on such Distribution Date;
(xvii) in the case of Certificates with a variable Pass-Through Rate,
the Pass-Through Rate applicable to such Distribution Date, and, if
available, the immediately succeeding Distribution Date, as calculated
in accordance with the method specified in the related Prospectus
Supplement;
(xviii) in the case of Certificates with a floating Pass-Through Rate,
for statements to be distributed in any month in which an adjustment
date occurs, the floating Pass-Through Rate applicable to such
Distribution Date and the immediately succeeding Distribution Date as
calculated in accordance with the method specified in the related
Prospectus Supplement;
(xix) as to any Series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of
the close of business on such Distribution Date; and
(xx) the aggregate amount of payments by the Mortgagors of (a) default
interest, (b) late charges and (c) assumption and modification fees
collected during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv)
above, the amounts shall be expressed as a dollar amount per minimum
denomination of Certificates or for such other specified portion thereof. In
addition, in the case of information furnished pursuant to subclauses (i),
(ii), (xiv), (xvi) and (xvii) above, such amounts shall also be provided with
respect to each component, if any, of a class of Certificates. The Master
Servicer or the Trustee, as specified in the related Prospectus Supplement,
will forward or cause to be forwarded to each holder of any class of
Certificates, to the Depositor and to such other parties as may be specified in
the Agreement, a copy of any statements or reports received by the Master
Servicer or the Trustee, as applicable, with respect to any CMBS. The
Prospectus Supplement for each Series of Offered Certificates will describe any
additional information to be included in reports to the holders of such
Certificates.
Within a reasonable period of time after the end of each calendar
year, the Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Certificate a statement containing the information set
forth in subclauses (i)-(iv) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Certificateholder.
Such obligation of the Master Servicer or the Trustee shall be deemed to have
been satisfied to the
39
<PAGE>
extent that substantially comparable information shall be provided by the
Master Servicer or the Trustee pursuant to any requirements of the Code as are
from time to time in force.
Unless and until Definitive Certificates are issued, or to the extent
provided in the related Prospectus Supplement, such statements or reports will
be forwarded by the Master Servicer or the Trustee to Cede. Such statements or
reports may be available to Beneficial Owners upon request to DTC or their
respective Participant or Indirect Participant. In addition, the Trustee shall
furnish a copy of any such statement or report to any Beneficial Owner which
requests such copy and certifies to the Trustee or the Master Servicer, as
applicable, that it is the Beneficial Owner of a Certificate. See "--Book-Entry
Registration and Definitive Certificates."
TERMINATION
The obligations created by the Agreements for each Series of
Certificates will terminate upon the payment to Certificateholders of that
Series of all amounts held in the Distribution Account or by any Servicer, if
any, or the Trustee and required to be paid to them pursuant to such Agreements
following the earlier of (i) the final payment or other liquidation of the last
Mortgage Asset subject thereto or the disposition of all property acquired upon
foreclosure of any Whole Loan subject thereto and (ii) the purchase of all of
the assets of the Trust Fund by the party entitled to effect such termination,
under the circumstances and in the manner set forth in the related Prospectus
Supplement. In no event, however, will the trust created by the Agreements
continue beyond the date specified in the related Prospectus Supplement.
Written notice of termination of the Agreements will be given to each
Certificateholder, and the final distribution will be made only upon
presentation and surrender of the Certificates at the location to be specified
in the notice of termination.
If so specified in the related Prospectus Supplement, a Series of
Certificates may be subject to optional early termination through the
repurchase of the assets in the related Trust Fund by the party specified
therein, under the circumstances and in the manner set forth therein. If so
provided in the related Prospectus Supplement, upon the reduction of the
Certificate Balance of a specified class or classes of Certificates to a
specified percentage or amount (not to exceed 10% of the principal balance of
the remaining Mortgage Assets), the party specified therein will solicit bids
for the purchase of all assets of the Trust Fund, or of a sufficient portion of
such assets to retire such class or classes or purchase such class or classes
at a price set forth in the related Prospectus Supplement, in each case, under
the circumstances and in the manner set forth therein. In such an event, the
applicable purchase price will be sufficient to pay the aggregate Certificate
Balance and any undistributed shortfall in interest of such class or classes of
Certificates. Further, in such an event, there will be no continuing direct or
indirect liability of the related trust or Certificateholders as sellers of
such assets in connection with any such sale.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
If so provided in the related Prospectus Supplement, one or more
classes of the Offered Certificates of any Series will be issued as Book-Entry
Certificates, and each such class will be represented by one or more single
Certificates registered in the name of a nominee for the depository, The
Depository Trust Company ("DTC").
If so provided in the related Prospectus Supplement, holders of
Book-Entry Certificates may hold their Certificates through DTC (in the United
States) or CEDEL or Euroclear (in Europe) if they are Participants of such
system, or indirectly through organizations that are participants in such
systems. CEDEL and Euroclear will hold omnibus positions on behalf of the CEDEL
Participants and the Euroclear Participants, respectively, through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositories (collectively, the "Depositaries"), which in turn will
hold such positions in customers' securities accounts in the Depositaries'
names on the books of DTC. DTC is a limited purpose trust company organized
under the New York Banking Law, a "banking organization" within the meaning of
the New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code (the "UCC") and
a "clearing agency" registered pursuant to Section 17A of the Securities
Exchange Act of 1934, as amended. DTC was created to hold securities for its
Participants and to facilitate the clearance and settlement of securities
transactions through electronic computerized book-entries, thereby eliminating
the need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations. Indirect
access to the DTC system also is available to others such as banks, brokers,
dealers and trust
40
<PAGE>
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between CEDEL Participants and Euroclear Participants will
occur in accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly through CEDEL Participants or
Euroclear Participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by its Depositary; however, such cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC,
and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing day, dated the business
day following the DTC settlement date, and such credits or any transactions in
such securities settled during such processing will be reported to the relevant
CEDEL Participant or Euroclear Participant on such business day. Cash received
in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
CEDEL or Euroclear cash account only as of the business day following
settlement in DTC.
The beneficial owners of Book-Entry Certificates that are not
Participants or Indirect Participants but desire to purchase, sell or otherwise
transfer ownership of, or other interest in, Book-Entry Certificates may do so
only through Participants and Indirect Participants. In addition, beneficial
owners of Book-Entry Certificates will receive all distributions of principal
and interest from the Trustee through the Participants who in turn will receive
them from DTC. Under a book-entry format, beneficial owners of Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede & Co., ("Cede") as nominee
for DTC. DTC will forward such payments to its Participants, which thereafter
will forward them to Indirect Participants or beneficial owners of Book-Entry
Certificates.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Book-Entry Certificates among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and Indirect Participants with which the beneficial owners of
Book-Entry Certificates have accounts with respect to the Book-Entry
Certificates similarly are required to make book-entry transfers and receive
and transmit such payments on behalf of their respective beneficial owners of
Book-Entry Certificates. Accordingly, although the beneficial owners of
Book-Entry Certificates will not possess the Book-Entry Certificates, the Rules
provide a mechanism by which Participants will receive payments on Book-Entry
Certificates and will be able to transfer their interest.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants, the ability of a holder of Book-Entry
Certificates to pledge such Certificates to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Certificates, may be limited due to the lack of a physical certificate for such
Certificates.
DTC has advised the Depositor that it will take any action permitted
to be taken by a beneficial owner of a Book-Entry Certificate under the Pooling
and Servicing Agreement only at the direction of one or more Participants to
whose accounts with DTC the Book-Entry Certificates are credited. DTC may take
conflicting actions with
41
<PAGE>
respect to other undivided interests to the extent that such actions are taken
on behalf of Participants whose holdings include such undivided interests.
Except as required by law, none of the Depositor, the Master Servicer,
the Trustee or the Fiscal Agent will have any liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Book-Entry Certificates held by Cede, as nominee for DTC, or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. CEDEL provides to its CEDEL Participants, among other
things, services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. CEDEL
interfaces with domestic markets in several countries. As a professional
depositary, CEDEL is subject to regulation by the Luxembourg Monetary
Institute. CEDEL Participants are recognized financial institutions around the
world, including underwriters, securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations and may
include the underwriters. Indirect access to CEDEL is also available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a CEDEL Participant, either directly or
indirectly.
Euroclear was created in 1968 to hold securities for participants of
the Euroclear system ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. The Euroclear system includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by Morgan Guaranty
Trust Company of New York, Brussels office (the "Euroclear Operator"), under
contract with Euroclear Clearance System, S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for the Euroclear system on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to the Euroclear system is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
The information contained herein concerning DTC, CEDEL and Euroclear
and their book-entry systems has been obtained from sources believed to be
reliable, but none of the Depositor, the Master Servicer, the Trustee or the
Fiscal Agent take any responsibility for the accuracy or completeness thereof.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued in book-entry form will be issued in fully
registered, certificated form to Beneficial Owners or their nominees
("Definitive Certificates"), rather than to DTC or its nominee only if (i) the
Depositor advises the Trustee in writing that DTC is no longer willing or able
to properly discharge its responsibilities as depository with respect to the
Certificates and the Depositor is unable to locate a qualified successor or
(ii) the Depositor, at its option, elects to terminate the book-entry system
through DTC.
Upon the occurrence of either of the events described in the
immediately preceding paragraph, DTC is required to notify all Participants of
the availability through DTC of Definitive Certificates for the Beneficial
Owners. Upon surrender by DTC of the certificate or certificates representing
the Book-Entry Certificates, together
42
<PAGE>
with instructions for reregistration, the Trustee will issue (or cause to be
issued) to the Beneficial Owners identified in such instructions the Definitive
Certificates to which they are entitled, and thereafter the Trustee will
recognize the holders of such Definitive Certificates as Certificateholders
under the Agreement.
DESCRIPTION OF THE AGREEMENTS
The Certificates of each Series evidencing interests in a Trust Fund
including Whole Loans will be issued pursuant to a Pooling and Servicing
Agreement among the Depositor, a Master Servicer, if specified in the related
Prospectus Supplement, a Special Servicer and the Trustee. The Certificates of
each Series evidencing interests in a Trust Fund not including Whole Loans will
be issued pursuant to a Trust Agreement between the Depositor and a Trustee.
The Master Servicer, any Special Servicer and the Trustee with respect to any
Series of Certificates will be named in the related Prospectus Supplement. In
lieu of appointing a Master Servicer, a servicer may be appointed pursuant to
the Pooling and Servicing Agreement for any Trust Fund. The Mortgage Loans
shall be serviced pursuant to the terms of the Pooling and Servicing Agreement.
A manager or administrator may be appointed pursuant to the Trust Agreement for
any Trust Fund to administer such Trust Fund. The provisions of each Agreement
will vary depending upon the nature of the Certificates to be issued thereunder
and the nature of the related Trust Fund. A form of a Pooling and Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. Any Trust Agreement will generally conform to the
form of Pooling and Servicing Agreement filed herewith, but will not contain
provisions with respect to the servicing and maintenance of Whole Loans. The
following summaries describe certain provisions that may appear in each
Agreement. The Prospectus Supplement for a Series of Certificates will describe
any provision of the Agreements relating to such Series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreements for each Trust Fund
and the description of such provisions in the related Prospectus Supplement. As
used herein with respect to any Series, the term "Certificate" refers to all of
the Certificates of that Series, whether or not offered hereby and by the
related Prospectus Supplement, unless the context otherwise requires. The
Depositor will provide a copy of the Agreements (without exhibits) relating to
any Series of Certificates without charge upon written request of a holder of a
Certificate of such Series addressed to the Trustee specified in the related
Prospectus Supplement.
ASSIGNMENT OF ASSETS, REPURCHASES
At the time of issuance of any Series of Certificates, the Depositor
will assign (or cause to be assigned) to the designated Trustee the Trust
Assets to be included in the related Trust Fund, together with all principal
and interest to be received on or with respect to such Trust Assets after the
Cut-off Date, other than principal and interest due on or before the Cut-off
Date and other than any Retained Interest. The Trustee will, concurrently with
such assignment, deliver the Certificates to the Depositor in exchange for the
Trust Assets and the other assets comprising the Trust Fund for such Series.
Each Mortgage Asset will be identified in a schedule appearing as an exhibit to
the related Agreement. To the extent provided in the related Prospectus
Supplement, such schedule will include detailed information (i) in respect of
each Whole Loan included in the related Trust Fund, including without
limitation, the address of the related Mortgaged Property and type of such
property, the Mortgage Interest Rate and, if applicable, the applicable index,
margin, adjustment date and any rate cap information, the original and
remaining term to maturity, the original and outstanding principal balance and
balloon payment, if any, the Value, Loan-to-Value Ratio and the Debt Service
Coverage Ratio as of the date indicated and payment and prepayment provisions,
if applicable, and (ii) in respect of each CMBS included in the related Trust
Fund, including without limitation, the CMBS Issuer, CMBS Servicer and CMBS
Trustee, the pass-through or bond rate or formula for determining such rate,
the issue date and original and remaining term to maturity, if applicable, the
original and outstanding principal amount and payment provisions, if
applicable.
With respect to each Whole Loan, the Depositor will deliver or cause
to be delivered to the Trustee (or to the custodian hereinafter referred to)
certain loan documents, which to the extent specified in the related Prospectus
Supplement will include the original Mortgage Note endorsed, without recourse,
in blank or to the order of the Trustee, the original Mortgage (or a copy
thereof) with evidence of recording indicated thereon and an assignment of the
Mortgage to the Trustee in recordable form. Notwithstanding the foregoing, a
Trust Fund may include
43
<PAGE>
Mortgage Loans where the original Mortgage Note is not delivered to the Trustee
if the Company delivers to the Trustee or the custodian a copy or a duplicate
original of the Mortgage Note, together with an affidavit certifying that the
original thereof has been lost or destroyed. With respect to such Mortgage
Loans, the Trustee (or its nominee) may not be able to enforce the Mortgage
Note against the related borrower. To the extent provided in the related
Prospectus Supplement, the related Agreements will require that the Depositor
or another party specified therein promptly cause each such assignment of
Mortgage to be recorded in the appropriate public office for real property
records, except in states where, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interest in
the related Whole Loan against the claim of any subsequent transferee or any
successor to or creditor of the Depositor, the Master Servicer, the relevant
Asset Seller or any other prior holder of the Whole Loan.
The Trustee (or a custodian) will review such Whole Loan documents
within a specified period of days after receipt thereof, and the Trustee (or a
custodian) will hold such documents in trust for the benefit of the
Certificateholders. To the extent specified in the related Prospectus
Supplement, if any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) shall immediately notify the
Depositor. If the Depositor cannot cure the omission or defect within a
specified number of days after receipt of such notice, then to the extent
specified in the related Prospectus Supplement, the Depositor will be
obligated, within a specified number of days of receipt of such notice, to
repurchase the related Whole Loan from the Trustee at the Purchase Price or
substitute for such Mortgage Loan. To the extent specified in the related
Prospectus Supplement, this repurchase or substitution obligation constitutes
the sole remedy available to the Certificateholders or the Trustee for omission
of, or a material defect in, a constituent document. To the extent specified in
the related Prospectus Supplement, in lieu of curing any omission or defect in
the Mortgage Asset or repurchasing or substituting for such Mortgage Asset, the
Depositor may agree to cover any losses suffered by the Trust Fund as a result
of such breach or defect.
If so provided in the related Prospectus Supplement, the Depositor
will, as to some or all of the Mortgage Loans, assign or cause to be assigned
to the Trustee the related Lease Assignments. In certain cases, the Trustee, or
Master Servicer, as applicable, may collect all moneys under the related Leases
and distribute amounts, if any, required under the Lease for the payment of
maintenance, insurance and taxes, to the extent specified in the related Lease
agreement. The Trustee, or if so specified in the Prospectus Supplement, the
Master Servicer, as agent for the Trustee, may hold the Lease in trust for the
benefit of the Certificateholders.
With respect to each CMBS in certificated form, the Depositor will
deliver or cause to be delivered to the Trustee (or the custodian) the original
certificate or other definitive evidence of such CMBS together with bond power
or other instruments, certifications or documents required to transfer fully
such CMBS to the Trustee for the benefit of the Certificateholders. With
respect to each CMBS in uncertificated or book-entry form or held through a
"clearing corporation" within the meaning of the UCC the Depositor and the
Trustee will cause such CMBS to be registered directly or on the books of such
clearing corporation or of a financial intermediary in the name of the Trustee
for the benefit of the Certificateholders. To the extent provided in the
related Prospectus Supplement, the related Agreement will require that either
the Depositor or the Trustee promptly cause any CMBS in certificated form not
registered in the name of the Trustee to be re-registered, with the applicable
persons, in the name of the Trustee.
REPRESENTATIONS AND WARRANTIES, REPURCHASES
To the extent provided in the related Prospectus Supplement the
Depositor will, with respect to each Whole Loan, make or assign representations
and warranties, as of a specified date (the person making such representations
and warranties, the "Warranting Party") covering, by way of example, the
following types of matters: (i) the accuracy of the information set forth for
such Whole Loan on the schedule of Mortgage Assets appearing as an exhibit to
the related Agreement; (ii) the existence of title insurance insuring the lien
priority of the Whole Loan; (iii) the authority of the Warranting Party to sell
the Whole Loan; (iv) the payment status of the Whole Loan and the status of
payments of taxes, assessments and other charges affecting the related
Mortgaged Property; (v) the existence of customary provisions in the related
Mortgage Note and Mortgage to permit realization against the
44
<PAGE>
Mortgaged Property of the benefit of the security of the Mortgage; and (vi) the
existence of hazard and extended perils insurance coverage on the Mortgaged
Property.
Any Warranting Party, if other than the Depositor, shall be an Asset
Seller or an affiliate thereof or such other person acceptable to the Depositor
and shall be identified in the related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan may
have been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the related Series of Certificates evidencing an interest in such
Whole Loan. To the extent specified in the related Prospectus Supplement, in
the event of a breach of any such representation or warranty, the Warranting
Party will be obligated to reimburse the Trust Fund for losses caused by any
such breach or either cure such breach or repurchase or replace the affected
Whole Loan as described below. Since the representations and warranties may not
address events that may occur following the date as of which they were made,
the Warranting Party will have a reimbursement, cure, repurchase or
substitution obligation in connection with a breach of such a representation
and warranty only if the relevant event that causes such breach occurs prior to
such date. Such party would have no such obligations if the relevant event that
causes such breach occurs after such date.
To the extent provided in the related Prospectus Supplement, the
Agreements will provide that the Master Servicer and/or Trustee will be
required to notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of a Whole Loan that
materially and adversely affects the value of such Whole Loan or the interests
therein of the Certificateholders. If such Warranting Party cannot cure such
breach within a specified period following the date on which such party was
notified of such breach, then such Warranting Party will be obligated to
repurchase such Whole Loan from the Trustee within a specified period from the
date on which the Warranting Party was notified of such breach, at the Purchase
Price therefor. As to any Whole Loan, the "Purchase Price" is generally equal
to the sum of the unpaid principal balance thereof, plus unpaid accrued
interest thereon at the Mortgage Interest Rate from the date as to which
interest was last paid to the due date in the Due Period in which the relevant
purchase is to occur, plus certain servicing expenses that are reimbursable to
each Servicer. If so provided in the Prospectus Supplement for a Series, a
Warranting Party, rather than repurchase a Whole Loan as to which a breach has
occurred, will have the option, within a specified period after initial
issuance of such Series of Certificates, to cause the removal of such Whole
Loan from the Trust Fund and substitute in its place one or more other Whole
Loans, in accordance with the standards described in the related Prospectus
Supplement. If so provided in the Prospectus Supplement for a Series, a
Warranting Party, rather than repurchase or substitute a Whole Loan as to which
a breach has occurred, will have the option to reimburse the Trust Fund or the
Certificateholders for any losses caused by such breach. To the extent
specified in the related Prospectus Supplement, this reimbursement, repurchase
or substitution obligation will constitute the sole remedy available to holders
of Certificates or the Trustee for a breach of representation by a Warranting
Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor any Servicer will be obligated to purchase or substitute for a Whole
Loan if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that Warranting Parties will carry out such obligations
with respect to Whole Loans.
To the extent provided in the related Prospectus Supplement the
Warranting Party will, with respect to a Trust Fund that includes CMBS, make or
assign certain representations or warranties, as of a specified date, with
respect to such CMBS, covering (i) the accuracy of the information set forth
therefor on the schedule of Mortgage Assets appearing as an exhibit to the
related Agreement and (ii) the authority of the Warranting Party to sell such
Mortgage Assets. The related Prospectus Supplement will describe the remedies
for a breach thereof.
Each Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation
in a Pooling and Servicing Agreement of a Master Servicer or Special Servicer
which materially and adversely affects the interests of the Certificateholders
and which continues unremedied for thirty days after the giving of written
notice of such breach to such Servicer by the Trustee or the Depositor, or to
such Servicer, the Depositor and the Trustee by the holders of Certificates
evidencing not less than 25% of the Voting Rights, will constitute an Event of
Default under such Pooling and Servicing Agreement. A breach of any such
representation in a Servicing Agreement of a Servicer
45
<PAGE>
which continues unremedied for thirty days after giving notice of such breach
to such Servicer will constitute an Event of Default under such Servicing
Agreement. See "Events of Default" and "Rights Upon Event of Default."
ACCOUNTS
General
Each Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Mortgage Assets
(collectively, the "Accounts"), which must be either (i) an account or accounts
the deposits in which are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC") (to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured such that the Certificateholders have a claim with
respect to the funds an Account or a perfected first priority security interest
against any collateral securing such funds that is superior to the claims of
any other depositors or general creditors of the institution with which such
Account is maintained or (ii) otherwise maintained with a bank or trust
company, and in a manner, satisfactory to the Rating Agency or Agencies rating
any class of Certificates of such Series. The collateral eligible to secure
amounts in an Account is limited to United States government securities and
other investment grade obligations specified in the Agreement ("Permitted
Investments"). An Account may be maintained as an interest bearing or a
non-interest bearing account and the funds held therein may be invested pending
each succeeding Distribution Date in certain short-term Permitted Investments.
To the extent provided in the related Prospectus Supplement, any interest or
other income earned on funds in an Account will be paid to a Servicer or its
designee as additional servicing compensation. An Account may be maintained
with an institution that is an affiliate of a Servicer provided that such
institution meets the standards imposed by the Rating Agency or Agencies. If
permitted by the Rating Agency or Agencies and so specified in the related
Prospectus Supplement, an Account may contain funds relating to more than one
Series of mortgage pass-through certificates and may contain other funds
respecting payments on mortgage loans belonging to a Servicer or serviced or
master serviced by it on behalf of others.
DEPOSITS
To the extent provided in the related Prospectus Supplement, the
Master Servicer will deposit or cause to be deposited in an Account on a daily
basis, to the extent provided in the related Agreement, the following payments
and collections received, or advances made, by the Master Servicer:
(i) all payments on account of principal, including principal
prepayments, on the Mortgage Assets;
(ii) all payments on account of interest on the Mortgage Assets,
including any default interest collected, in each case net of any
portion thereof retained by a Servicer as its servicing compensation;
(iii) all proceeds of the hazard, business interruption and general
liability insurance policies to be maintained in respect of each
Mortgaged Property securing a Whole Loan in the Trust Fund (to the
extent such proceeds are not applied to the restoration of the
property or released to the Mortgagor in accordance with the normal
servicing procedures of a Servicer, subject to the terms and
conditions of the related Mortgage and Mortgage Note) and all proceeds
of rental interruption policies, if any, insuring against losses
arising from the failure of Lessees under a Lease to make timely
rental payments because of certain casualty events (collectively,
"Insurance Proceeds") and all other amounts received and retained in
connection with the liquidation of defaulted Mortgage Loans in the
Trust Fund, by foreclosure, condemnation or otherwise together with
the net proceeds on a monthly basis with respect to any Mortgaged
Properties acquired for the benefit of Certificateholders by
foreclosure or by deed in lieu of foreclosure or otherwise;
(iv) any advances made as described under "Description of the
Certificates -- Advances in Respect of Delinquencies";
(v) any amounts representing Prepayment Premiums;
46
<PAGE>
(vi) any amounts received from a Special Servicer; but excluding any
REO Proceeds and penalties or modification fees which may be retained
by the Master Servicer. REO Proceeds shall be maintained in an Account
by the Special Servicer.
The Special Servicer will remit funds on deposit in the Account it
maintains together with any P&I Advances to the Master Servicer for deposit in
an Account maintained by the Master Servicer.
Withdrawals
A Servicer may, from time to time, to the extent provided in the
related Agreement and described in the related Prospectus Supplement, make
withdrawals from an Account for each Trust Fund for any of the following
purposes:
(i) to reimburse a Servicer for unreimbursed amounts advanced as
described under "Description of the Certificates -- Advances in
Respect of Delinquencies," such reimbursement to be made out of
amounts received which were identified and applied by such Servicer as
late collections of interest on and principal of the particular Whole
Loans with respect to which the advances were made;
(ii) to reimburse a Servicer for unpaid servicing fees earned and
certain unreimbursed servicing expenses incurred with respect to Whole
Loans and properties acquired in respect thereof, such reimbursement
to be made out of amounts that represent Liquidation Proceeds and
Insurance Proceeds collected on the particular Whole Loans and
properties, and net income collected on the particular properties,
with respect to which such fees were earned or such expenses were
incurred;
(iii) to reimburse a Servicer for any advances described in clause (i)
above and any servicing expenses described in clause (ii) above which,
in the Master Servicer's good faith judgment, will not be recoverable
from the amounts described in clauses (i) and (ii), respectively, such
reimbursement to be made from amounts collected on other Trust Assets
or, if and to the extent so provided by the related Agreement and
described in the related Prospectus Supplement, just from that portion
of amounts collected on other Trust Assets that is otherwise
distributable on one or more classes of Subordinate Certificates, if
any, remain outstanding, and otherwise any outstanding class of
Certificates, of the related Series;
(iv) if and to the extent described in the related Prospectus
Supplement, to pay a Servicer interest accrued on the advances
described in clause (i) above and the servicing expenses described in
clause (ii) above while such remain outstanding and unreimbursed;
(v) to the extent provided in the related Prospectus Supplement, to
pay a Servicer, as additional servicing compensation, interest and
investment income earned in respect of amounts held in the Account;
and
(vi) to make any other withdrawals permitted by the related Agreement
and described in the related Prospectus Supplement.
If and to the extent specified in the Prospectus Supplement amounts
may be withdrawn from any Account to cover additional costs, expenses or
liabilities associated with: the preparation of environmental site assessments
with respect to, and for containment, clean-up or remediation of hazardous
wastes and materials, the proper operation, management and maintenance of any
Mortgaged Property acquired for the benefit of Certificateholders by
foreclosure or by deed in lieu of foreclosure or otherwise, such payments to be
made out of income received on such property; if one or more elections have
been made to treat the Trust Fund or designated portions thereof as a REMIC,
any federal, state or local taxes imposed on the Trust Fund or its assets or
transactions, as and to the extent described under "Federal Income Tax
Consequences -- REMIC -- Prohibited Transactions and Other Taxes" in the case
of REMIC; retaining an independent appraiser or other expert in real estate
matters to determine a fair sale price for a defaulted Whole Loan or a property
acquired in respect thereof in connection with the liquidation of such Whole
Loan or
47
<PAGE>
property; and obtaining various opinions of counsel pursuant to the related
Agreement for the benefit of Certificateholders.
Distribution Account
To the extent specified in the related Prospectus Supplement, the
Trustee will, as to each Trust Fund, establish and maintain, or cause to be
established and maintained, one or more separate Accounts for the collection of
payments from the Master Servicer immediately preceding each Distribution Date
(the "Distribution Account"). The Trustee will also deposit or cause to be
deposited in a Distribution Account the following amounts:
(i) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related Series of Certificates as
described under "Description of Credit Support";
(ii) any amounts paid under any Cash Flow Agreement, as described
under "Description of the Trust Funds -- Cash Flow Agreements";
(iii) all proceeds of any Trust Asset or, with respect to a Whole
Loan, property acquired in respect thereof purchased by the Depositor,
any Asset Seller or any other specified person, and all proceeds of
any Mortgage Asset purchased as described under "Description of the
Certificates -- Termination" (also, Liquidation Proceeds); and
(iv) any other amounts required to be deposited in the Distribution
Account as provided in the related Agreement and described in the
related Prospectus Supplement.
The Trustee may, from time to time, to the extent provided in the
related Agreements and described in the related Prospectus Supplement, make a
withdrawal from a Distribution Account to make distributions to the
Certificateholders on each Distribution Date.
OTHER COLLECTION ACCOUNTS
Notwithstanding the foregoing, if so specified in the related
Prospectus Supplement, the Agreement for any Series of Certificates may provide
for the establishment and maintenance of a separate collection account into
which the Master Servicer or Special Servicer will deposit on a daily basis the
amounts described under "--Accounts -- Deposits" above for one or more Series
of Certificates. Any amounts on deposit in any such collection account will be
withdrawn therefrom and deposited into the appropriate Distribution Account by
a time specified in the related Prospectus Supplement. To the extent specified
in the related Prospectus Supplement, any amounts which could be withdrawn from
the Distribution Account as described under "--Accounts -- Withdrawals" above,
may also be withdrawn from any such collection account. The Prospectus
Supplement will set forth any restrictions with respect to any such collection
account, including investment restrictions and any restrictions with respect to
financial institutions with which any such collection account may be
maintained.
COLLECTION AND OTHER SERVICING PROCEDURES
Master Servicer
The Master Servicer is required under each Pooling and Servicing
Agreement to make reasonable efforts to collect all scheduled payments under
the Mortgage Loans and will follow or cause to be followed such collection
procedures as it would follow with respect to mortgage loans that are
comparable to the Mortgage Loans and held for its own account, provided such
procedures are consistent with (i) the terms of the related Pooling and
Servicing Agreement, (ii) applicable law and (iii) the general servicing
standard specified in the related Prospectus Supplement or, if no such standard
is so specified, its normal servicing practices (in either case, the "Servicing
Standard").
The Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining (or causing
the Mortgagor or Lessee on each Mortgage or Lease to maintain) hazard,
48
<PAGE>
business interruption and general liability insurance policies (and, if
applicable, rental interruption policies) as described herein and in any
related Prospectus Supplement, and filing and settling claims thereunder;
maintaining escrow or impoundment accounts of Mortgagors for payment of taxes,
insurance and other items required to be paid by an Mortgagor pursuant to the
Mortgage Loan; processing assumptions or substitutions in those cases where the
Master Servicer has determined not to enforce any applicable due-on-sale
clause; attempting to cure delinquencies; supervising foreclosures; inspecting
and managing Mortgaged Properties under certain circumstances; and maintaining
accounting records relating to the Mortgage Loans.
The Master Servicer shall monitor the actions of the Special Servicer
to confirm compliance with the Agreements.
To the extent specified in the related Prospectus Supplement, a Master
Servicer, as servicer of the Mortgage Loans, on behalf of itself, the Trustee
and the Certificateholders, will present claims to the obligor under each
instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Mortgage Loans. See "Description of Credit Support."
If a Master Servicer or its designee recovers payments under any
instrument of Credit Support with respect to any defaulted Mortgage Loan, the
Master Servicer will be entitled to withdraw or cause to be withdrawn from the
Distribution Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Mortgage Loan, unreimbursed servicing expenses incurred with respect to
the Mortgage Loan and any unreimbursed advances of delinquent payments made
with respect to the Mortgage Loan. See "--Hazard Insurance Policies" and
"Description of Credit Support."
Sub-Servicers
A Master Servicer may delegate its servicing obligations in respect
of the Whole Loans to third-party servicers (each, a "Sub-Servicer"), but such
Master Servicer will remain obligated under the related Agreement. Each
sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must be consistent with the terms of the related
Agreement and must provide that, if for any reason the Master Servicer for the
related series of Certificates is no longer acting in such capacity, the
Trustee or any successor Master Servicer may assume the Master Servicer's
rights and obligations under such Sub-Servicing Agreement.
Generally, the Master Servicer will be solely liable for all fees owed
by it to any Sub-Servicer, irrespective of whether the Master Servicer's
compensation pursuant to the related Agreement is sufficient to pay such fees.
However, a Sub-Servicer may be entitled to a Retained Interest in certain Whole
Loans. Each Sub-Servicer will be reimbursed by the Master Servicer for certain
expenditures which it makes, generally to the same extent the Master Servicer
would be reimbursed under an Agreement. See "Retained Interest, Servicing
Compensation and Payment of Expenses."
Special Servicer
A Mortgagor's failure to make required payments may reflect inadequate
income or the diversion of that income from the service of payments due under
the Mortgage Loan, and may call into question such Mortgagor's ability to make
timely payment of taxes and to pay for necessary maintenance of the related
Mortgaged Property. To the extent provided in the related Prospectus
Supplement, upon the occurrence of any of the following events (each a
"Servicing Transfer Event") with respect to a Mortgage Loan, servicing for such
Mortgage Loan (thereafter, a "Specially Serviced Mortgage Loan") will be
transferred from the Master Servicer to the Special Servicer:
a) such Mortgage Loan becomes a defaulted Mortgage Loan,
b) the occurrence of certain events indicating the possible insolvency
of the Mortgagor,
c) the receipt by the Master Servicer of a notice of foreclosure of
any other lien on the related Mortgaged Property,
d) the Master Servicer determines that a payment default is imminent,
49
<PAGE>
e) with respect to a Balloon Mortgage Loan, no assurances have been
given as to the ability of the Mortgagor to make the final payment
thereon, or
f) the occurrence of certain other events constituting defaults under
the terms of such Mortgage Loan.
The Special Servicer is required to monitor any Mortgage Loan which is
in default, contact the Mortgagor concerning the default, evaluate whether the
causes of the default can be cured over a reasonable period without significant
impairment of the value of the Mortgaged Property, initiate corrective action
in cooperation with the Mortgagor if cure is likely, inspect the Mortgaged
Property and take such other actions as are consistent with the Servicing
Standard. A significant period of time may elapse before the Special Servicer
is able to assess the success of such corrective action or the need for
additional initiatives.
The time within which the Special Servicer makes the initial
determination of appropriate action evaluates the success of corrective action,
develops additional initiatives, institutes foreclosure proceedings and
actually forecloses (or takes a deed to a Mortgaged Property in lieu of
foreclosure) on behalf of the Certificateholders, may vary considerably
depending on the particular Mortgage Loan, the Mortgaged Property, the
Mortgagor, the presence of an acceptable party to assume the Mortgage Loan and
the laws of the jurisdiction in which the Mortgaged Property is located. Under
federal bankruptcy law, the Special Servicer in certain cases may not be
permitted to accelerate a Mortgage Loan or to foreclose on a Mortgaged Property
for a considerable period of time. See "Certain Legal Aspects of the Mortgage
Loans and the Leases."
Any Agreement relating to a Trust Fund that includes Mortgage Loans
may grant to the Master Servicer and/or the holder or holders of certain
classes of Certificates a right of first refusal to purchase from the Trust
Fund at a predetermined purchase price any such Mortgage Loan as to which a
specified number of scheduled payments thereunder are delinquent. Any such
right granted to the holder of an Offered Certificate will be described in the
related Prospectus Supplement. The related Prospectus Supplement will also
describe any such right granted to any person if the predetermined purchase
price is less than the Purchase Price described under "--Representations and
Warranties; Repurchases."
The Special Servicer may agree to modify, waive or amend any term of
any Specially Serviced Mortgage Loan in a manner consistent with the Servicing
Standard so long as the modification, waiver or amendment will not (i) affect
the amount or timing of any scheduled payments of principal or interest on the
Mortgage Loan or (ii) in its judgment, materially impair the security for the
Mortgage Loan or reduce the likelihood of timely payment of amounts due
thereon. Generally, the Special Servicer also may agree to any modification,
waiver or amendment that would so affect or impair the payments on, or the
security for, a Mortgage Loan if (i) in its judgment, a material default on the
Mortgage Loan has occurred or a payment default is imminent and (ii) in its
judgment, such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Mortgage Loan on a present value
basis than would liquidation. The Special Servicer is required to notify the
Trustee in the event of any modification, waiver or amendment of any Mortgage
Loan.
The Special Servicer, on behalf of the Trustee, may at any time
institute foreclosure proceedings, exercise any power of sale contained in any
mortgage, obtain a deed in lieu of foreclosure, or otherwise acquire title to a
Mortgaged Property securing a Mortgage Loan by operation of law or otherwise,
if such action is consistent with the Servicing Standard and a default on such
Mortgage Loan has occurred or, in the Special Servicer's judgment, is imminent.
The Special Servicer generally may not acquire title to any related Mortgaged
Property or take any other action that would cause the Trustee, for the benefit
of Certificateholders, or any other specified person 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, unless the Special Servicer has previously determined,
based on a report prepared by a person who regularly conducts environmental
audits (which report will be an expense of the Trust Fund), that:
(i) the Mortgaged Property is in compliance with applicable
environmental laws; or if not, that taking such actions as are
necessary to bring the Mortgaged Property in compliance therewith is
reasonably likely to
50
<PAGE>
produce a greater recovery on a present value basis, after taking into
account any risks associated therewith, than not taking such actions;
and
(ii) and there are no circumstances present at the Mortgaged Property
relating to the use, management or disposal of any hazardous
substances, hazardous materials, wastes, or petroleum-based materials
for which investigation, testing, monitoring, containment, clean-up or
remediation could be required under any federal, state or local law or
regulation or that, if any such materials are present, taking such
action with respect to the affected Mortgaged Property is reasonably
likely to produce a greater recovery on a present value basis, after
taking into account any risks associated therewith, than not taking
such actions.
To the extent provided in the related Prospectus Supplement, if title
to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Special Servicer, on behalf of the Trust Fund, will
be required to sell the Mortgaged Property within two years of acquisition,
unless (i) the Internal Revenue Service grants an extension of time to sell
such property or (ii) the Trustee receives an opinion of independent counsel to
the effect that the holding of the property by the Trust Fund by the close of
the third taxable year following the taxable year of the property's acquisition
will not result in the imposition of a tax on the Trust Fund or cause the Trust
Fund to fail to qualify as a REMIC under the Code at any time that any
Certificate is outstanding. Subject to the foregoing, the Special Servicer will
be required to (i) solicit bids 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 the first (and, if multiple bids are contemporaneously
received, the highest) cash bid received from any person that constitutes a
fair price.
If the Trust Fund acquires title to any Mortgaged Property, the
Special Servicer, on behalf of the Trust Fund, may retain an independent
contractor to manage and operate such property. The retention of an independent
contractor, however, will not relieve the Special Servicer of any of its
obligations with respect to the management and operation of such Mortgaged
Property. To the extent specified in the related Prospectus Supplement, any
such property acquired by the Trust Fund will be managed in a manner consistent
with the management and operation of similar property by a prudent lending
institution.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made with respect to the
related Trust Fund) on the operations and ownership of any Mortgaged Property
acquired on behalf of the Trust Fund may result in the recovery of an amount
less than the amount that would otherwise be recovered. See "Certain Legal
Aspects of the Mortgage Loans and the Leases -- Foreclosure."
If recovery on a defaulted Mortgage Loan under any related instrument
of Credit Support is not available, the Special Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Mortgage Loan. If the proceeds of any liquidation of the property securing the
defaulted Mortgage Loan are less than the outstanding principal balance of the
defaulted 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 Trust Fund will realize a loss in the amount of such difference.
The Special Servicer will be entitled to withdraw or cause to be withdrawn from
a related Account out of the Liquidation Proceeds recovered on any defaulted
Mortgage Loan, prior to the distribution of such Liquidation Proceeds to
Certificateholders, amounts representing its normal servicing compensation on
the Mortgage Loan, unreimbursed servicing expenses incurred with respect to the
Mortgage Loan and any unreimbursed advances of delinquent payments made with
respect to the Mortgage Loan.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy are insufficient to
restore the damaged property to a condition sufficient to permit recovery under
the related instrument of Credit Support, if any, the Special Servicer is not
required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the Master Servicer for its expenses and (ii) that such expenses will be
recoverable by it from related Insurance Proceeds or Liquidation Proceeds.
51
<PAGE>
HAZARD INSURANCE POLICIES
To the extent specified in the related Prospectus Supplement, each
Agreement for a Trust Fund that includes Whole Loans will require the Master
Servicer to cause the Mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage. To the extent specified in the related Prospectus Supplement, such
coverage will be in general in an amount equal to the amount necessary to fully
compensate for any damage or loss to the improvements on the Mortgaged Property
on a replacement cost basis, but not less than the amount necessary to avoid
the application of any co-insurance clause contained in the hazard insurance
policy. The ability of the Master Servicer to assure that hazard insurance
proceeds are appropriately applied may be dependent upon its being named as an
additional insured under any hazard insurance policy and under any other
insurance policy referred to below, or upon the extent to which information in
this regard is furnished by Mortgagors. All amounts collected by the Master
Servicer under any such policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the Mortgagor in
accordance with the Master Servicer's normal servicing procedures, subject to
the terms and conditions of the related Mortgage and Mortgage Note) will be
deposited in a related Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the Whole Loans will be underwritten
by different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry
rot, vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties
securing the Whole Loans will typically contain a co-insurance clause that in
effect requires the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
improvements on the property in order to recover the full amount of any partial
loss. If the insured's coverage falls below this specified percentage, such
clause generally provides that the insurer's liability in the event of partial
loss does not exceed the lesser of (i) the replacement cost of the improvements
less physical depreciation and (ii) such proportion of the loss as the amount
of insurance carried bears to the specified percentage of the full replacement
cost of such improvements.
The Agreements for a Trust Fund that includes Whole Loans will require
the Master Servicer to cause the Mortgagor on each Whole Loan, or, in certain
cases, the related Lessee, to maintain all such other insurance coverage with
respect to the related Mortgaged Property as is consistent with the terms of
the related Mortgage, which insurance may typically include flood insurance (if
the related Mortgaged Property was located at the time of origination in a
federally designated flood area).In addition, to the extent required by the
related Mortgage, the Master Servicer may require the Mortgagor or related
Lessee to maintain other forms of insurance including, but not limited to, loss
of rent endorsements, business interruption insurance and comprehensive public
liability insurance. Any cost incurred by the Master Servicer in maintaining
any such insurance policy will be added to the amount owing under the Mortgage
Loan where the terms of the Mortgage Loan so permit; provided, however, that
the addition of such cost will not be taken into account for purposes of
calculating the distribution to be made to Certificateholders. Such costs may
be recovered by a Servicer from a related Account, with interest thereon, as
provided by the Agreements.
RENTAL INTERRUPTION INSURANCE POLICY
If so specified in the related Prospectus Supplement, the Master
Servicer or the Mortgagors will maintain rental interruption insurance policies
in full force and effect with respect to some or all of the Leases. Although
the terms of such policies vary to some degree, a rental interruption insurance
policy typically provides that, to the extent that a Lessee fails to make
timely rental payments under the related Lease due to a casualty event, such
losses will be reimbursed to the insured. If so specified in the related
Prospectus Supplement, the Master Servicer will be required to pay from its
servicing compensation the premiums on the rental interruption policy on a
timely basis. If
52
<PAGE>
so specified in the Prospectus Supplement, if such rental interruption policy
is canceled or terminated for any reason (other than the exhaustion of total
policy coverage), the Master Servicer will exercise its best reasonable efforts
to obtain from another insurer a replacement policy comparable to the rental
interruption policy with a total coverage that is equal to the then existing
coverage of the terminated rental interruption policy; provided that if the
cost of any such replacement policy is greater than the cost of the terminated
rental interruption policy, the amount of coverage under the replacement policy
will, to the extent specified in the related Prospectus Supplement, be reduced
to a level such that the applicable premium does not exceed, by a percentage
that may be set forth in the related Prospectus Supplement, the cost of the
rental interruption policy that was replaced. Any amounts collected by the
Master Servicer under the rental interruption policy in the nature of insurance
proceeds will be deposited in a related Account.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
To the extent specified in the related Prospectus Supplement, the
Agreements will require that the Servicers obtain and maintain in effect a
fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination thereof insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
such Servicer. The related Agreements will allow a Servicer to self-insure
against loss occasioned by the errors and omissions of the officers, employees
and agents of the Master Servicer or the Special Servicer so long as certain
criteria set forth in the Agreements are met.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Whole Loans may contain clauses requiring the consent
of the mortgagee to any sale or other transfer of the related Mortgaged
Property, or due-on-sale clauses entitling the mortgagee to accelerate payment
of the Whole Loan upon any sale or other transfer of the related Mortgaged
Property. Certain of the Whole Loans may contain clauses requiring the consent
of the mortgagee to the creation of any other lien or encumbrance on the
Mortgaged Property or due-on-encumbrance clauses entitling the mortgagee to
accelerate payment of the Whole Loan upon the creation of any other lien or
encumbrance upon the Mortgaged Property. To the extent provided in the related
Prospectus Supplement, the Master Servicer, on behalf of the Trust Fund, will
exercise any right the Trustee may have as mortgagee to accelerate payment of
any such Whole Loan or to withhold its consent to any transfer or further
encumbrance. To the extent specified in the related Prospectus Supplement, any
fee collected by or on behalf of the Master Servicer for entering into an
assumption agreement will be retained by or on behalf of the Master Servicer as
additional servicing compensation. See "Certain Legal Aspects of the Mortgage
Loans and the Leases -- Due-on-Sale and Due-on-Encumbrance."
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a Series of Certificates will specify
whether there will be any Retained Interest in the Mortgage Assets, and, if so,
the initial owner thereof. If so, the Retained Interest will be established on
a loan-by-loan basis and will be specified on an exhibit to the related
Agreement. A "Retained Interest" in a Mortgage Asset represents a specified
portion of the interest payable thereon. The Retained Interest will be deducted
from Mortgagor payments as received and will not be part of the related Trust
Fund.
To the extent specified in the related Prospectus Supplement, each
Servicer's primary servicing compensation with respect to a Series of
Certificates will come from the periodic payment to it of a portion of the
interest payment on each Mortgage Asset. Since any Retained Interest and a
Servicer's primary compensation are percentages of the principal balance of
each Mortgage Asset, such amounts will decrease in accordance with the
amortization of the Mortgage Assets. The Prospectus Supplement with respect to
a Series of Certificates evidencing interests in a Trust Fund that includes
Whole Loans may provide that, as additional compensation, a Servicer may retain
all or a portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from Mortgagors and any interest or other income
which may be earned on funds held in a related Account.
The Master Servicer may, to the extent provided in the related
Prospectus Supplement, pay from its servicing compensation certain expenses
incurred in connection with its servicing and managing of the Mortgage
53
<PAGE>
Assets, including, without limitation, payment of the fees and disbursements of
the Trustee and independent accountants, payment of expenses incurred in
connection with distributions and reports to Certificateholders, and payment of
any other expenses described in the related Prospectus Supplement. Certain
other expenses, including certain expenses relating to defaults and
liquidations on the Whole Loans and, to the extent so provided in the related
Prospectus Supplement, interest thereon at the rate specified therein, and the
fees of any Special Servicer, may be borne by the Trust Fund.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement will provide that on or before a
specified date in each year, beginning on a date specified therein, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers, the servicing by or on behalf of the Master Servicer was
conducted in compliance with the terms of such agreements except for any
exceptions the Uniform Single Attestation Program for Mortgage Bankers requires
it to report.
The Pooling and Servicing Agreement will also provide for delivery to
the Trustee, on or before a specified date in the Master year, of an annual
statement signed by an officer of the Master Servicer to the effect that the
Master Servicer has fulfilled its obligations under the Pooling and Servicing
Agreement throughout the preceding calendar year or other specified
twelve-month period.
To the extent provided in the related Prospectus Supplement, copies of
such annual accountants' statement and such statements of officers will be
obtainable by Certificateholders and Beneficial Owners without charge upon
written request to the Master Servicer or the Trustee at the address set forth
in the related Prospectus Supplement; provided that such Beneficial Owner shall
have certified to the Master Servicer or the Trustee that it is the Beneficial
Owner of a Certificate.
CERTAIN MATTERS REGARDING EACH SERVICER AND THE DEPOSITOR
The Master Servicer and the Special Servicer, or a servicer for
substantially all the Whole Loans under each Agreement will be named in the
related Prospectus Supplement. Each entity serving as Servicer (or as such
servicer) may be an affiliate of the Depositor and may have other normal
business relationships with the Depositor or the Depositor's affiliates.
Reference herein to a Servicer shall be deemed to be to the servicer of
substantially all of the Whole Loans, if applicable.
To the extent specified in the related Prospectus Supplement, the
related Agreement will provide that any Servicer may resign from its
obligations and duties thereunder only with the consent of the Trustee, which
may not be unreasonably withheld or upon a determination that its duties under
the Agreement are no longer permissible under applicable law. No such
resignation will become effective until a successor servicer has assumed such
Servicer's obligations and duties under the Pooling and Servicing Agreement. To
the extent specified in the related Prospectus Supplement, the Pooling and
Servicing Agreement will further provide that none of the Servicers, or any
officer, employee, or agent thereof will be under any liability to the related
Trust Fund or Certificateholders for any action taken, or for refraining from
the taking of any action in accordance with the servicing standards set forth
in the Pooling and Servicing Agreement, in good faith; provided, however, that
no Servicer nor any such person will be protected against any breach of a
representation or warranty made in such Agreement, or against any liability
specifically imposed thereby, or against any liability which would otherwise be
imposed by reason of willful misfeasance, bad faith or negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. To the extent specified in the related
Prospectus Supplement, the Depositor shall be liable only to the extent of its
obligations specifically imposed upon and undertaken by the Depositor. To the
extent specified in the related Prospectus Supplement, the Pooling and
Servicing Agreement will further provide that each Servicer will be entitled to
indemnification by the related Trust Fund against any loss, liability or
expense incurred in connection with any legal action relating to the Pooling
and Servicing Agreement or the Mortgage Loans; provided, however, that such
indemnification will not extend to any loss, liability or expense incurred by
reason of misfeasance, bad faith or negligence in the performance of
obligations or duties thereunder, or by reason of reckless disregard of such
obligations or duties. In addition, the Pooling and Servicing Agreement will
provide
54
<PAGE>
that no Servicer will be under any obligation to appear in, prosecute or defend
any legal action which is not incidental to its responsibilities under the
Pooling and Servicing Agreement and which in its opinion may involve it in any
expense or liability. Any Servicer may, however, with the consent of the
Trustee undertake any such action which it may deem necessary or desirable with
respect to the Agreement and the rights and duties of the parties thereto and
the interests of the Certificateholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
expenses, costs and liabilities of the Certificateholders, and the Servicer
will be entitled to be reimbursed therefor.
Any person into which a Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
a Servicer or the Depositor is a party, or any person succeeding to the
business of a Servicer or the Depositor will be the successor of such Servicer
or the Depositor, as applicable, under the related Agreements.
EVENTS OF DEFAULT
To the extent provided in the related Prospectus Supplement for a
Trust Fund that includes Whole Loans, "Event of Default" with respect to a
Servicer under the related Agreements will include (i) any failure by such
Servicer to distribute or cause to be distributed to the Trustee, another
Servicer or the Certificateholders, any required payment on the date due or
within a specified grace period; (ii) any failure by such Servicer to timely
deliver a report that continues unremedied for a certain number days after
receipt of notice of such failure has been given to such Servicer by the
Trustee or another Servicer; (iii) any failure by such Servicer duly to observe
or perform in any material respect any of its other covenants or obligations
under the Agreement which continues unremedied for a specified number of days
after written notice of such failure has been given to such Servicer; (iv) any
breach of a representation or warranty made by such Servicer under the
Agreement which materially and adversely affects the interests of
Certificateholders and which continues unremedied for a specified number of
days after written notice of such breach has been given to such Servicer; (v)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and certain actions by or on behalf of such
Servicer indicating its insolvency or inability to pay its obligations; and
(vi) any failure by such Servicer to maintain a required license to do business
or service the Mortgage Loans pursuant to the related Agreements. Material
variations to the foregoing Events of Default will be specified in the related
Prospectus Supplement. To the extent specified in the related Prospectus
Supplement, the Trustee shall, not later than the later of a specified number
of days after the occurrence of any event which constitutes or, with notice or
lapse of time or both, would constitute an Event of Default and a specified
number of days after certain officers of the Trustee become aware of the
occurrence of such an event, transmit by mail to the Depositor and all
Certificateholders of the applicable Series notice of such occurrence, unless
such default shall have been cured or waived.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under an Agreement remains unremedied,
the Depositor or the Trustee may, and at the direction of holders of
Certificates evidencing not less than a percentage of the Voting Rights
specified in the related Prospectus Supplement, the Trustee shall, terminate
all of the rights and obligations of the related Servicer under the Agreement
and in and to the Mortgage Loans (other than as a Certificateholder or as the
owner of any Retained Interest), whereupon the Master Servicer (or if such
Servicer is the Master Servicer, the Trustee) will succeed to all of the
responsibilities, duties and liabilities of such Servicer under the Agreements
(except that if the Trustee is prohibited by law from obligating itself to make
advances regarding delinquent mortgage loans, or if the related Prospectus
Supplement so specifies, then the Trustee will not be obligated to make such
advances) and will be entitled to similar compensation arrangements. To the
extent specified in the related Prospectus Supplement, in the event that the
Trustee is unwilling or unable so to act, it may or, at the written request of
the holders of Certificates entitled to a percentage of the Voting Rights
specified in the related Prospectus Supplement, it shall appoint, or petition a
court of competent jurisdiction for the appointment of, a loan servicing
institution acceptable to the Rating Agency with a net worth at the time of
such appointment as specified in the related Prospectus Supplement to act as
successor to the Master Servicer under the Agreement. Pending such appointment,
the Trustee is obligated to act in such capacity. The Trustee and any such
successor may agree upon the servicing compensation to be paid, which, to the
extent so specified in the related Prospectus Supplement, may be no greater
than the compensation payable to the Master Servicer under the Agreement.
55
<PAGE>
To the extent described in the related Prospectus Supplement, the
holders of Certificates representing the percentage of the Voting Rights
specified in such Prospectus Supplement allocated to the respective classes of
Certificates affected by any Event of Default will be entitled to waive such
Event of Default; provided, however, that an Event of Default involving a
failure to distribute a required payment to Certificateholders described in
clause (i) under "--Events of Default" may be waived only by all of the
Certificateholders. Upon any such waiver of an Event of Default, such Event of
Default shall cease to exist and shall be deemed to have been remedied for
every purpose under the Agreement.
No Certificateholder will have the right under any Agreement to
institute any proceeding with respect thereto unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Certificates evidencing not less than the percentage of the Voting Rights
specified in the related Prospectus Supplement have made written request upon
the Trustee to institute such proceeding in its own name as Trustee thereunder
and have offered to the Trustee reasonable indemnity, and the Trustee for a
specified number of days has neglected or refused to institute any such
proceeding. The Trustee, however, is under no obligation to exercise any of the
trusts or powers vested in it by any Agreement or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the holders of Certificates covered by such Agreement, unless such
Certificateholders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
As described under "Description of the Certificates -- Book-Entry
Registration and Definitive Certificates," unless and until Definitive
Certificates are issued, Beneficial Owners may only exercise their rights as
owners of Certificates indirectly through DTC, or their respective Participants
and Indirect Participants.
AMENDMENT
Each Agreement may be amended by the parties thereto, without the
consent of any of the holders of Certificates covered by the Agreement, (i) to
cure any ambiguity, (ii) to correct, modify or supplement any provision therein
which may be inconsistent with any other provision therein, (iii) to make any
other provisions with respect to matters or questions arising under the
Agreement which are not inconsistent with the provisions thereof, or (iv) to
comply with any requirements imposed by the Code; provided that such amendment
(other than an amendment for the purpose specified in clause (iv) above) will
not (as evidenced by an opinion of counsel to such effect) adversely affect in
any material respect the interests of any holder of Certificates covered by the
Agreement. To the extent specified in the related Prospectus Supplement, each
Agreement may also be amended by the Depositor, the Master Servicer, if any,
and the Trustee, with the consent of the holders of Certificates affected
thereby evidencing not less than 51% of the Voting Rights, for any purpose;
provided, however, that to the extent specified in the related Prospectus
Supplement, no such amendment may (i) reduce in any manner the amount of or
delay the timing of, payments received or advanced on Mortgage Loans which are
required to be distributed on any Certificate without the consent of the holder
of such Certificate, (ii) adversely affect in any material respect the
interests of the holders of any class of Certificates in a manner other than as
described in (i), without the consent of the holders of all Certificates of
such class or (iii) modify the provisions of such Agreement described in this
paragraph without the consent of the holders of all Certificates covered by
such Agreement then outstanding. However, with respect to any Series of
Certificates as to which a REMIC election is to be made, the Trustee will not
consent to any amendment of the Agreement unless it shall first have received
an opinion of counsel to the effect that such amendment will not result in the
imposition of a tax on the related Trust Fund or cause the related Trust Fund
to fail to qualify as a REMIC at any time that the related Certificates are
outstanding.
THE TRUSTEE
The Trustee under each Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company serving as Trustee may have a banking
relationship with the Depositor and its affiliates and with any Master Servicer
and its affiliates.
56
<PAGE>
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or
sufficiency of any Agreement, the Certificates or any Trust Asset or related
document and is not accountable for the use or application by or on behalf of
any Servicer of any funds paid to such Servicer or its designee in respect of
the Certificates or the Trust Assets, or deposited into or withdrawn from any
Account or any other account by or on behalf of any Servicer. If no Event of
Default has occurred and is continuing, the Trustee is required to perform only
those duties specifically required under the related Agreements. However, upon
receipt of the various certificates, reports or other instruments required to
be furnished to it, the Trustee is required to examine such documents and to
determine whether they conform to the requirements of the Agreements.
CERTAIN MATTERS REGARDING THE TRUSTEE
To the extent specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Distribution Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's (i) enforcing its rights and remedies
and protecting the interests, and enforcing the rights and remedies, of the
Certificateholders during the continuance of an Event of Default, (ii)
defending or prosecuting any legal action in respect of the related Agreement
or Series of Certificates, (iii) being the mortgagee of record with respect to
the Mortgage Loans in a Trust Fund and the owner of record with respect to any
Mortgaged Property acquired in respect thereof for the benefit of
Certificateholders, or (iv) acting or refraining from acting in good faith at
the direction of the holders of the related Series of Certificates entitled to
not less than 25% (or such higher percentage as is specified in the related
Agreement with respect to any particular matter) of the Voting Rights for such
Series; provided, however, that such indemnification will not extend to any
loss, liability or expense that constitutes a specific liability of the Trustee
pursuant to the related Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the Trustee in the performance of its obligations and duties thereunder, or
by reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties
under an Agreement by giving written notice thereof to the Depositor, the
Master Servicer, if any, and all Certificateholders. Upon receiving such notice
of resignation, the Depositor is required promptly to appoint a successor
trustee acceptable to the Master Servicer, if any. If no successor trustee
shall have been so appointed and have accepted appointment within 30 days after
the giving of such notice of resignation, the resigning Trustee may petition
any court of competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as
such under the related Agreements, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, then the Depositor
may remove the Trustee and appoint a successor trustee acceptable to the Master
Servicer, if any. Holders of the Certificates of any Series entitled to at
least 51% of the Voting Rights for such Series may at any time remove the
Trustee without cause and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a
successor trustee shall not become effective until acceptance of appointment by
the successor trustee.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
57
<PAGE>
For any Series of Certificates, Credit Support may be provided with
respect to one or more classes thereof or the related Mortgage Assets. Credit
Support may be in the form of the subordination of one or more classes of
Certificates, letters of credit, insurance policies, guarantees, the
establishment of one or more reserve funds or another method of Credit Support
described in the related Prospectus Supplement, or any combination of the
foregoing. If so provided in the related Prospectus Supplement, any form of
Credit Support may be structured so as to be drawn upon by more than one Series
to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a
Series of Certificates, the Credit Support will not provide protection against
all risks of loss and will not guarantee repayment of the entire Certificate
Balance of the Certificates and interest thereon. If losses or shortfalls occur
that exceed the amount covered by Credit Support or that are not covered by
Credit Support, Certificateholders will bear their allocable share of
deficiencies. Moreover, if a form of Credit Support covers more than one Series
of Certificates (each, a "Covered Trust"), holders of Certificates evidencing
interests in any of such Covered Trusts will be subject to the risk that such
Credit Support will be exhausted by the claims of other Covered Trusts prior to
such Covered Trust receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more classes of
Certificates of a Series, or the related Mortgage Assets, the related
Prospectus Supplement will include a description of (a) the nature and amount
of coverage under such Credit Support, (b) any conditions to payment thereunder
not otherwise described herein, (c) the conditions (if any) under which the
amount of coverage under such Credit Support may be reduced and under which
such Credit Support may be terminated or replaced and (d) the material
provisions relating to such Credit Support. Additionally, the related
Prospectus Supplement will set forth certain information with respect to the
obligor under any instrument of Credit Support, including (i) a brief
description of its principal business activities, (ii) its principal place of
business, place of incorporation and the jurisdiction under which it is
chartered or licensed to do business, (iii) if applicable, the identity of
regulatory agencies that exercise primary jurisdiction over the conduct of its
business and (iv) its total assets, and its stockholders' or policyholders'
surplus, if applicable, as of the date specified in the Prospectus Supplement.
See "Risk Factors -- Credit Support Limitations."
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more
classes of Certificates of a Series may be Subordinate Certificates. To the
extent specified in the related Prospectus Supplement, the rights of the
holders of Subordinate Certificates to receive distributions of principal and
interest from the Distribution Account on any Distribution Date will be
subordinated to such rights of the holders of Senior Certificates. If so
provided in the related Prospectus Supplement, the subordination of a class may
apply only in the event of (or may be limited to) certain types of losses or
shortfalls. The related Prospectus Supplement will set forth information
concerning the amount of subordination of a class or classes of Subordinate
Certificates in a Series, the circumstances in which such subordination will be
applicable and the manner, if any, in which the amount of subordination will be
effected.
CROSS-SUPPORT PROVISIONS
If the Mortgage Assets for a Series are divided into separate groups,
each supporting a separate class or classes of Certificates of a Series, credit
support may be provided by cross-support provisions requiring that
distributions be made on Senior Certificates evidencing interests in one group
of Mortgage Assets prior to distributions on Subordinate Certificates
evidencing interests in a different group of Mortgage Assets within the Trust
Fund. The Prospectus Supplement for a Series that includes a cross-support
provision will describe the manner and conditions for applying such provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO THE WHOLE LOANS
If so provided in the Prospectus Supplement for a Series of
Certificates, the Whole Loans in the related Trust Fund will be covered for
various default risks by insurance policies or guarantees. A copy of any such
material instrument for a Series will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed within 15 days of issuance
of the Certificates of the related Series.
58
<PAGE>
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a Series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by one or more letters of credit,
issued by a bank or financial institution specified in such Prospectus
Supplement (the "L/C Bank"). Under a letter of credit, the L/C Bank will be
obligated to honor draws thereunder in an aggregate fixed dollar amount, net of
unreimbursed payments thereunder, generally equal to a percentage specified in
the related Prospectus Supplement of the aggregate principal balance of the
Mortgage Assets on the related Cut-off Date or of the initial aggregate
Certificate Balance of one or more classes of Certificates. If so specified in
the related Prospectus Supplement, the letter of credit may permit draws in the
event of only certain types of losses and shortfalls. The amount available
under the letter of credit will, in all cases, be reduced to the extent of the
unreimbursed payments thereunder and may otherwise be reduced as described in
the related Prospectus Supplement. The obligations of the L/C Bank under the
letter of credit for each Series of Certificates will expire at the earlier of
the date specified in the related Prospectus Supplement or the termination of
the Trust Fund. A copy of any such letter of credit for a Series will be filed
with the Commission as an exhibit to a Current Report on Form 8-K to be filed
within 15 days of issuance of the Certificates of the related Series.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a Series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by insurance policies and/or surety
bonds provided by one or more insurance companies or sureties. Such instruments
may cover, with respect to one or more classes of Certificates of the related
Series, timely distributions of interest and/or full distributions of principal
on the basis of a schedule of principal distributions set forth in or
determined in the manner specified in the related Prospectus Supplement. A copy
of any such instrument for a Series will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed with the Commission within
15 days of issuance of the Certificates of the related Series.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a Series of
Certificates, deficiencies in amounts otherwise payable on such Certificates or
certain classes thereof will be covered by one or more reserve funds in which
cash, a letter of credit, Permitted Investments, a demand note or a combination
thereof will be deposited, in the amounts so specified in such Prospectus
Supplement. The reserve funds for a Series may also be funded over time by
depositing therein a specified amount of the distributions received on the
related Trust Assets as specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a Series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Certificates. If so specified in the
related Prospectus Supplement, reserve funds may be established to provide
limited protection against only certain types of losses and shortfalls.
Following each Distribution Date amounts in a reserve fund in excess of any
amount required to be maintained therein may be released from the reserve fund
under the conditions and to the extent specified in the related Prospectus
Supplement and will not be available for further application to the
Certificates.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus
Supplement. To the extent specified in the related Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited to the
related Reserve Fund for such Series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as
additional compensation. The Reserve Fund, if any, for a Series will not be a
part of the Trust Fund unless otherwise specified in the related Prospectus
Supplement.
59
<PAGE>
Additional information concerning any Reserve Fund will be set forth
in the related Prospectus Supplement, including the initial balance of such
Reserve Fund, the balance required to be maintained in the Reserve Fund, the
manner in which such required balance will decrease over time, the manner of
funding such Reserve Fund, the purposes for which funds in the Reserve Fund may
be applied to make distributions to Certificateholders and use of investment
earnings from the Reserve Fund, if any.
CREDIT SUPPORT WITH RESPECT TO CMBS
If so provided in the Prospectus Supplement for a Series of
Certificates, the CMBS in the related Trust Fund and/or the Mortgage Loans
underlying such CMBS may be covered by one or more of the types of Credit
Support described herein. The related Prospectus Supplement will specify as to
each such form of Credit Support the information indicated above with respect
thereto, to the extent such information is material and available.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND THE LEASES
The following discussion contains general summaries of certain legal
aspects of loans secured by commercial and multifamily residential properties
that are general in nature. Because such legal aspects are governed by
applicable state law (which laws may differ substantially), the summaries do
not purport to be complete nor to reflect the laws of any particular state, nor
to encompass the laws of all states in which the security for the Mortgage
Loans is situated. See "Description of the Trust Funds--Assets."
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and
secured by instruments granting a security interest in real property which may
be mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the
instrument in the appropriate public recording office. However, recording does
not generally establish priority over governmental claims for real estate taxes
and assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance
of real property between two parties -- a Mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor (the equivalent of a
Mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, "Mortgagor" includes
the trustor under a deed of trust and a grantor under a security deed or a deed
to secure debt. Under a deed of trust, the Mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by
the related mortgage note. In case the Mortgagor under a mortgage is a land
trust, there would be an additional party because legal title to the property
is held by a land trustee under a land trust agreement for the benefit of the
Mortgagor. At origination of a mortgage loan involving a land trust, the
Mortgagor executes a separate undertaking to make payments on the mortgage
note. The mortgagee's authority under a mortgage, the trustee's authority under
a deed of trust and the grantee's authority under a deed to secure debt are
governed by the express provisions of the mortgage, the law of the state in
which the real property is located, certain federal laws (including, without
limitation, the Soldiers' and Sailors' Civil Relief Act of 1940) and, in some
cases, in deed of trust transactions, the directions of the beneficiary.
60
<PAGE>
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed
or deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate 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, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. The Seller will make certain representations and
warranties in the Agreement with respect to the Mortgage Loans which are
secured by an interest in a leasehold estate. Such representation and
warranties will be set forth in the Prospectus Supplement if applicable.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the Mortgagor assigns its
right, title and interest as landlord under each lease and the income derived
therefrom to the lender, while the Mortgagor retains a revocable license to
collect the rents for so long as there is no default. Under such assignments,
the Mortgagor typically assigns its right, title and interest as lessor under
each lease and the income derived therefrom to the mortgagee, while retaining a
license to collect the rents for so long as there is no default under the
mortgage loan documentation. The manner of perfecting the mortgagee's interest
in rents may depend on whether the Mortgagor's assignment was absolute or one
granted as security for the loan. Failure to properly perfect the mortgagee's
interest in rents may result in the loss of substantial pool of funds, which
could otherwise serve as a source of repayment for such loan. If the Mortgagor
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
and/or obtain a court-appointed receiver before becoming entitled to collect
the rents. In most states, hotel and motel room rates are considered accounts
receivable under the UCC; generally these rates are either assigned by the
Mortgagor, which remains entitled to collect such rates absent a default, or
pledged by the Mortgagor, as security for the loan. In general, the lender must
file financing statements in order to perfect its security interest in the
rates and must file continuation statements, generally every five years, to
maintain perfection of such security interest. Even if the lender's security
interest in room rates is perfected under the UCC, the lender will generally be
required to commence a foreclosure or otherwise take possession of the property
in order to collect the room rates after a default.
Even after a foreclosure, the potential rent payments from the
property may be less than the periodic payments that had been due under the
mortgage. For instance, the net income that would otherwise be generated from
the property may be less than the amount that would have been needed to service
the mortgage debt if the leases on the property are at below-market rents, or
as the result of excessive maintenance, repair or other obligations which a
lender succeeds to as landlord.
Lenders that actually take possession of the property, however, may
incur potentially substantial risks attendant to being a mortgagee in
possession. Such risks include liability for environmental clean-up costs and
other risks inherent in property ownership. See "Environmental Legislation"
below.
PERSONALTY
Certain types of Mortgaged Properties, such as hotels, motels and
industrial plants, are likely to derive a significant part of their value from
personal property which does not constitute "fixtures" under applicable state
real property law and, hence, would not be subject to the lien of a mortgage.
Such property is generally pledged or assigned as security to the lender under
the UCC. In order to perfect its security interest therein, the lender
generally must file UCC financing statements and, to maintain perfection of
such security interest, file continuation statements generally every five
years.
61
<PAGE>
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a Series of
Offered Certificate, the Mortgage Loans may also consist of cooperative
apartment loans ("Cooperative Loans") secured by security interests in shares
issued by a cooperative housing corporation (a "Cooperative") and in the
related proprietary leases or occupancy agreements granting exclusive rights to
occupy specific dwelling units in the cooperatives' buildings. The security
agreement will create a lien upon, or grant a title interest in, the property
which it covers, the priority of which will depend on the terms of the
particular security agreement as well as the order of recordation of the
agreement in the appropriate recording office. Such a lien or title interest is
not prior to the lien for real estate taxes and assessments and other charges
imposed under governmental police powers.
Each cooperative owns in fee or has a leasehold interest in all the
real property and owns in fee or leases the building and all separate dwelling
units therein. The cooperative is directly responsible for property management
and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is a blanket mortgage
or mortgages on the cooperative apartment building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the cooperative, as property Mortgagor, or lessee, as the case may
be, is also responsible for meeting these mortgage or rental obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
either the construction or purchase of the cooperative's apartment building or
obtaining of capital by the cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that cooperative is the
landlord are generally subordinate to the interest of the holder of a blanket
mortgage and to the interest of the holder of a land lease. If the cooperative
is unable to meet the payment obligations (i) arising under a blanket mortgage,
the mortgagee holding a blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements or (ii)
arising under its land lease, the holder of the landlord's interest under the
land lease could terminate it and all subordinate proprietary leases and
occupancy agreements. Also, a blanket mortgage on a cooperative may provide
financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at maturity.
The inability of the cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the cooperative's interest in the property and
termination of all proprietary leases and occupancy agreement. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by whomever financed the purchase by an individual tenant
stockholder of cooperative shares or, in the case of the Mortgage Loans, the
collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed
through a cooperative share loan evidenced by a promissory note and secured by
an assignment of and a security interest in the occupancy agreement or
proprietary lease and a security interest in the related cooperative shares.
The lender generally takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares. See "--Foreclosure -- Cooperative Loans" below.
Foreclosure
62
<PAGE>
General
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under
the mortgage. If the Mortgagor defaults in payment or performance of its
obligations under the note or mortgage, the mortgagee has the right to
institute foreclosure proceedings to sell the mortgaged property at public
auction to satisfy the indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage
vary from state to state. Two primary methods of foreclosing a mortgage are
judicial foreclosure and non-judicial foreclosure pursuant to a power of sale
granted in the mortgage instrument. There are several other foreclosure
procedures available in some states that are either infrequently used or
available only in certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having a subordinate interest
of record in the real property and all parties in possession of the property,
under leases or otherwise, whose interests are subordinate to the mortgage.
Delays in completion of the foreclosure may occasionally result from
difficulties in locating defendants. When the lender's right to 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.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
Mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may
require the lender to undertake affirmative and expensive actions to determine
the cause of the Mortgagor's default and the likelihood that the Mortgagor will
be able to reinstate the loan. In some cases, courts have substituted their
judgment for the lender's and have required that lenders reinstate loans or
recast payment schedules in order to accommodate Mortgagors who are suffering
from a temporary financial disability. In other cases, courts have limited the
right of the lender to foreclose if the default under the mortgage is not
monetary, e.g., the Mortgagor failed to maintain the mortgaged property
adequately or the Mortgagor executed a junior mortgage on the mortgaged
property. The exercise by the court of its equity powers will depend on the
individual circumstances of each case presented to it. Finally, some courts
have been faced with the issue of whether federal or state constitutional
provisions reflecting due process concerns for adequate notice require that a
Mortgagor receive notice in addition to statutorily-prescribed minimum notice.
For the most part, these cases have upheld the reasonableness of the notice
provisions or have found that a public sale under a mortgage providing for a
power of sale does not involve sufficient state action to afford constitutional
protections to the Mortgagor.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses are raised or counterclaims are interposed, and
sometimes require several years to complete. Moreover, as discussed below, a
non- collusive, regularly conducted foreclosure sale may be challenged as a
fraudulent conveyance, regardless of the parties' intent, if a court determines
that the sale was for less than fair consideration and such sale occurred while
the Mortgagor was insolvent (or the Mortgagor was rendered insolvent as a
result of such sale) and within one year (or within the state statute of
limitations if the trustee in bankruptcy elects to proceed under state
fraudulent conveyance law) of the filing of bankruptcy.
Non-Judicial Foreclosure/Power of Sale
63
<PAGE>
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed
of trust. A power of sale is typically granted in a deed of trust. It may also
be contained in any other type of mortgage instrument. A power of sale allows a
non-judicial public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
Mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such
sale, the trustee under a deed of trust must record a notice of default and
notice of sale and send a copy to the Mortgagor and to any other party who has
recorded a request for a copy of a notice of default and notice of sale. In
addition in some states the trustee must provide notice to any other party
having an interest of record in the real property, including junior
lienholders. A notice of sale must be posted in a public place and, in most
states, published for a specified period of time in one or more newspapers. The
Mortgagor or junior lienholder may then have the right, during a reinstatement
period required in some states, to cure the default by paying the entire actual
amount in arrears (without acceleration) plus the expenses incurred in
enforcing the obligation. In other states, the Mortgagor or the junior
lienholder is not provided a period to reinstate the loan, but has only the
right to pay off the entire debt to prevent the foreclosure sale. Generally,
the procedure for public sale, the parties entitled to notice, the method of
giving notice and the applicable time periods are governed by state law and
vary among the states. Foreclosure of a deed to secure debt is also generally
accomplished by a non-judicial sale similar to that required by a deed of
trust, except that the lender or its agent, rather than a trustee, is typically
empowered to perform the sale in accordance with the terms of the deed to
secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of such property
at the time of sale, due to, among other things, redemption rights which may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. 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 interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses which may be recovered by a lender. Thereafter, subject to the
Mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and
have both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will have the obligation to pay debt service on any senior
mortgages, to pay taxes, obtain casualty insurance and to make such repairs at
its own expense as are necessary to render the property suitable for sale.
Frequently, the lender employs a third party management company to manage and
operate the property. The costs of operating and maintaining a commercial or
multifamily residential property may be significant and may be greater than the
income derived from that property. The costs of management and operation of
those mortgaged properties which are hotels, motels, restaurants, nursing or
convalescent homes or hospitals may be particularly significant because of the
expertise, knowledge and, with respect to nursing or convalescent homes or
hospitals, regulatory compliance, required to run such operations and the
effect which foreclosure and a change in ownership may have on the public's and
the industry's (including franchisors') perception of the quality of such
operations. The lender will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale of the
property. Depending upon market conditions, the ultimate proceeds of the sale
of the property may not equal the lender's investment in the property.
Moreover, a lender commonly incurs substantial legal fees and court costs in
acquiring a mortgaged property through contested foreclosure and/or bankruptcy
proceedings. Furthermore, a few states require that any environmental
contamination at certain types of properties be cleaned up before a property
may be resold. In addition, a lender may be responsible under federal or state
law for the cost of cleaning up a mortgaged property that is environmentally
contaminated. See "Environmental Legislation." Generally state law controls the
amount of foreclosure expenses and costs, including attorneys' fees, that may
be recovered by a lender. A junior mortgagee may not foreclose on the property
securing the junior mortgage unless it forecloses subject to senior mortgages
and any other prior liens, in which case it may be obliged to make payments on
the senior mortgages to avoid their foreclosure. In addition, in the event that
the foreclosure of a junior mortgage triggers the enforcement of a
"due-on-sale" clause contained in a senior mortgage, the junior mortgagee may
be required to pay the full amount of the senior mortgage to avoid its
foreclosure. Accordingly, with respect to those Mortgage Loans which are junior
mortgage loans, if the lender purchases the property the lender's title will be
subject to all senior mortgages, prior liens and certain governmental liens.
64
<PAGE>
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage under which the sale was conducted.
Any proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the Mortgagor is in default. Any additional
proceeds are generally payable to the Mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
In connection with a Series of Certificates for which an election is
made to qualify the Trust Fund, or a portion thereof, as a REMIC, the REMIC
Provisions and the Agreement may require the Master Servicer to hire an
independent contractor to operate any foreclosed property relating to Whole
Loans.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the Mortgagor, and all persons who have an
interest in the property which is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having an interest which is subordinate to that of the foreclosing
mortgagee have an equity of redemption and may redeem the property by paying
the entire debt with interest. In addition, in some states, when a foreclosure
action has been commenced, the redeeming party must pay certain costs of such
action. Those having an equity of redemption must generally be made parties and
joined in the foreclosure proceeding in order for their equity of redemption to
be cut off and terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the
Mortgagor, must be exercised prior to foreclosure sale and should be
distinguished from the post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the Mortgagor and foreclosed junior lienors are given a statutory period in
which to redeem the property from the foreclosure sale. In some states,
statutory redemption may occur only upon payment of the foreclosure sale price.
In other states, redemption may be authorized if the former Mortgagor pays only
a portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser from
a foreclosure sale or sale under a deed of trust. Consequently, the practical
effect of the redemption right is to force the lender to maintain the property
and pay the expenses of ownership until the redemption period has expired. In
some states, a post-sale statutory right of redemption may exist following a
judicial foreclosure, but not following a trustee's sale under a deed of trust.
Under the REMIC Provisions and FASIT Provisions currently in effect,
property acquired by foreclosure generally must not be held beyond the close of
the third taxable year following the taxable year the property was acquired. To
the extent provided in the related Prospectus Supplement, with respect to a
Series of Certificates for which an election is made to qualify the Trust Fund
or a part thereof as a REMIC, the Agreement will permit foreclosed property to
be held for longer than the permitted period if the Internal Revenue Service
grants an extension of time within which to sell such property or independent
counsel renders an opinion to the effect that holding such property for such
additional period is permissible under the REMIC Provisions or FASIT
Provisions, as applicable. This grace period may be reduced for foreclosed
property other than real property or personal property incident to real
property by Treasury regulations under the FASIT Provisions (which have not yet
been issued). To the extent any such property may be acquired by a Trust Fund
making a FASIT election, the related Prospectus Supplement will specify the
applicable grace period beyond which the Trust FASIT may not hold such
foreclosed property.
Anti-Deficiency Legislation
Some or all of the Mortgage Loans may be nonrecourse loans, as to
which recourse may be had only against the specific property securing the
related Mortgage Loan and a personal money judgment may not be
65
<PAGE>
obtained against the Mortgagor. Even if a mortgage loan by its terms provides
for recourse to the Mortgagor, some states impose prohibitions or limitations
on such recourse. For example, statutes in some states limit the right of the
lender to obtain a deficiency judgment against the Mortgagor following
foreclosure or sale under a deed of trust. A deficiency judgment would be a
personal judgment against the former Mortgagor equal to the difference between
the net amount realized upon the public sale of the real property and the
amount due to the lender. Some states require the lender to exhaust the
security afforded under a mortgage by foreclosure in an attempt to satisfy the
full debt before bringing a personal action against the Mortgagor. In certain
other states, the lender has the option of bringing a personal action against
the Mortgagor on the debt without first exhausting such security; however, in
some of these states, the lender, following judgment on such personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. In some cases, a lender will be
precluded from exercising any additional rights under the note or mortgage if
it has taken any prior enforcement action. Consequently, the practical effect
of the election requirement, in those states permitting such election, is that
lenders will usually proceed against the security first rather than bringing a
personal action against the Mortgagor. Finally, other statutory provisions
limit any deficiency judgment against the former Mortgagor following a judicial
sale to the excess of the outstanding debt over the fair market value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a lender from obtaining a large deficiency judgment
against the former Mortgagor as a result of low or no bids at the judicial
sale.
Leasehold Risks
Mortgage Loans may be secured by a mortgage on a ground lease.
Leasehold mortgages are subject to certain risks not associated with mortgage
loans secured by the fee estate of the Mortgagor. The most significant of these
risks is that the ground lease creating the leasehold estate could terminate,
leaving the leasehold mortgagee without its security. The ground lease may
terminate if, among other reasons, the ground lessee breaches or defaults in
its obligations under the ground lease or there is a bankruptcy of the ground
lessee or the ground lessor. This risk may be minimized if the ground lease
contains certain provisions protective of the mortgagee, but the ground leases
that secure Mortgage Loans may not contain some of these protective provisions,
and mortgages may not contain the other protections discussed in the next
paragraph. Protective ground lease provisions include the right of the
leasehold mortgagee to receive notices from the ground lessor of any defaults
by the Mortgagor; the right to cure such defaults, with adequate cure periods;
if a default is not susceptible of cure by the leasehold mortgagee, the right
to acquire the leasehold estate through foreclosure or otherwise; the ability
of the ground lease to be assigned to and by the leasehold mortgagee or
purchaser at a foreclosure sale and for the concomitant release of the ground
lessee's liabilities thereunder; and the right of the leasehold mortgagee to
enter into a new ground lease with the ground lessor on the same terms and
conditions as the old ground lease in the event of a termination thereof.
In addition to the foregoing protections, a leasehold mortgagee may
require that the ground lease or leasehold mortgage prohibit the ground lessee
from treating the ground lease as terminated in the event of the ground
lessor's bankruptcy and rejection of the ground lease by the trustee for the
debtor-ground lessor. As further protection, a leasehold mortgage may provide
for the assignment of the debtor-ground lessee's right to reject a lease
pursuant to Section 365 of the Bankruptcy Reform Act of 1978, as amended (Title
11 of the United States Code) (the "Bankruptcy Code"), although the
enforceability of such clause has not been established. Without the protections
described above, a leasehold mortgagee may lose the collateral securing its
leasehold mortgage. In addition, terms and conditions of a leasehold mortgage
are subject to the terms and conditions of the ground lease. Although certain
rights given to a ground lessee can be limited by the terms of a leasehold
mortgage, the rights of a ground lessee or a leasehold mortgagee with respect
to, among other things, insurance, casualty and condemnation will be governed
by the provisions of the ground lease.
Cooperative Loans
The cooperative shares owned by the tenant-stockholder and pledged to
the lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's Certificate of Incorporation and By-laws, as well as
the proprietary lease or occupancy agreement, and may be cancelled by the
cooperative for failure by the tenant- stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy
66
<PAGE>
agreement generally permits the Cooperative to terminate such lease or
agreement in the event an obligor fails to make payments or defaults in the
performance of covenants required thereunder. Typically, the lender and the
Cooperative enter into a recognition agreement which establishes the rights and
obligations of both parties in the event of a default by the tenant-stockholder
under the proprietary lease or occupancy agreement will usually constitute a
default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement is terminated, the Cooperative will recognize the lender's lien
against proceeds from the sale of the Cooperative apartment, subject, however,
to the Cooperative's right to sums due under such proprietary lease or
occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a
foreclosure sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted according to
the usual practice of banks selling similar collateral will be considered
reasonably conducted.
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. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building was so converted.
BANKRUPTCY LAWS
The Bankruptcy Code and related state laws may interfere with or
affect the ability of a lender to realize upon collateral and/or to enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) are
automatically stayed upon the filing of the bankruptcy petition and, usually,
no interest or principal payments are made and no interest accrues 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 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 for the lender are met, the amount and terms of a mortgage secured
by property of the debtor may be modified under certain circumstances. In some
circumstances, the outstanding amount of the loan secured by the real property
may be reduced to the then-current value of the property pursuant to a
confirmed plan or lien avoidance proceeding, thus leaving the lender with a
general unsecured claim for the difference between such value and the
outstanding balance of the loan. Other modifications may include the reduction
in the amount of each scheduled payment, which
67
<PAGE>
reduction may result from a reduction in the rate of interest and/or the
alteration of the repayment schedule (with or without affecting the unpaid
principal balance of the loan), and/or an extension (or reduction) of the final
maturity date. It is possible that a bankruptcy court would confirm a plan of
reorganization, based on the particular facts of the reorganization case, that
provided for the curing of a mortgage loan default through payment of
arrearages over a number of years. Also, under federal bankruptcy law, a
bankruptcy court may permit a debtor through its plan of reorganization to
de-accelerate a secured loan and to reinstate the loan even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been
entered in state court (provided no sale of the property had yet occurred)
prior to the filing of the debtor's petition.
Federal bankruptcy law provides generally that rights and obligation
under an unexpired lease of the debtor may not be terminated or modified at any
time after the commencement of a case under the Bankruptcy Code solely on the
basis of a provision in the lease that is conditioned upon the commencement of
the bankruptcy case or certain other similar events. This prohibition on
so-called "ipso facto clauses" could limit the ability of the Trustee for a
Series of Certificates to exercise certain contractual remedies with respect to
the Leases.
In addition, Section 362 of the Bankruptcy Code operates as an
automatic stay of, among other things, any act to obtain possession of property
from a debtor's estate, which may delay a Trustee's exercise of such remedies
for a related Series of Certificates in the event that a related Lessee or a
related Mortgagor becomes the subject of a proceeding under the Bankruptcy
Code. For example, a mortgagee would be stayed from enforcing a Lease
Assignment by a Mortgagor related to a Mortgaged Property if the related
Mortgagor were in a bankruptcy proceeding. The legal proceedings necessary to
resolve the issues could be time-consuming and might result in significant
delays in the receipt of the assigned rents. Similarly, the filing of a
petition in bankruptcy by or on behalf of a Lessee of a Mortgaged Property
would result in a stay 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. An assignment of rents and other
proceeds of a Mortgage Loan may not be respected in bankruptcy if the
assignment is not fully and timely perfected under state law prior to
commencement of the bankruptcy proceeding. See "--Leases and Rents" above.
In addition, the Bankruptcy Code generally provides that a trustee or
debtor-in-possession may, subject to approval of the court, (a) assume a lease
and retain it or assign it to a third party or (b) reject the lease. If a lease
under which the debtor is a lessee is assumed, the trustee in bankruptcy on
behalf of the lessee, or the lessee as debtor-in-possession, or the assignee,
if applicable, must cure any defaults under the lease, compensate the lessor
for its losses and provide the lessor with "adequate assurance" of future
performance. Such remedies may be insufficient, however, as the lessor may be
forced to continue under the lease with a lessee that is a poor credit risk or
an unfamiliar tenant if the lease was assigned, and any assurances provided to
the lessor may, in fact, be inadequate. If the lease is rejected, such
rejection generally constitutes a breach of the lease immediately before the
date of the filing of the petition. As a consequence, the other party or
parties to such lease, such as the Mortgagor, as lessor under a Lease, would
have only an unsecured claim against the debtor for damages resulting from such
breach, which could adversely affect the security for the related Mortgage
Loan. In addition, pursuant to Section 502(b)(6) of the Bankruptcy Code, a
lessor's damages for lease rejection in respect of future rent installments are
limited to the rent reserved by the lease, without acceleration, for the
greater of one year or 15%, not to exceed three years, of the remaining term of
the lease.
If a trustee in bankruptcy on behalf of a lessor, or a lessor as
debtor-in-possession, rejects an unexpired lease of real property, the lessee
may generally treat such lease as terminated by such rejection or, in the
alternative, the lessee may retain its rights under the lease (including
possession) for the balance of such term and for any renewal or extension of
such term to the extent such rights are enforceable by the lessee under
applicable nonbankruptcy law. The Bankruptcy Code provides that if a lessee
elects to remain in possession after such a rejection of a lease, the lessee
may offset against rents reserved under the lease for the balance of the term
after the date of rejection of the lease, and any renewal or extension thereof,
any damages caused by the nonperformance after such date of any obligation of
the lessor under the lease. To the extent provided in the related Prospectus
Supplement, the Lessee will agree under certain Leases to pay all amounts owing
thereunder to the Master Servicer without offset. To the extent that such a
contractual obligation remains enforceable against the Lessee, the Lessee
68
<PAGE>
would not be able to avail itself of the rights of offset generally afforded to
lessees of real property under the Bankruptcy Code in the event their lessors
become the subject of bankruptcy proceedings.
In a bankruptcy or similar proceeding of a Mortgagor, action may be
taken seeking the recovery, as a preferential transfer or on other grounds, of
any payments made by the Mortgagor, or made directly by the related Lessee,
under the related Mortgage Loan to the Trust Fund. Payments on long-term debt
may be protected from recovery as preferences if they are payments in the
ordinary course of business made on debts incurred in the ordinary course of
business. Whether any particular payment would be protected depends upon the
facts specific to a particular transaction.
A trustee in bankruptcy or debtor in possession, 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
bankruptcy court may authorize the granting of liens senior to the lien of a
mortgage, and certain state statutes and general principles of equity may also
provide a Mortgagor with means to halt a foreclosure proceeding or sale and to
force a restructuring of a mortgage loan on terms a lender would not otherwise
accept. Moreover, the laws of certain states also give priority to certain tax
liens over the lien of a mortgage or deed of trust. In addition, under the
Bankruptcy Code, if the court finds that the mortgagee engaged in inequitable
conduct, the mortgagee's claim may be subordinated to the claims of unsecured
creditors.
To the extent described in the related Prospectus Supplement, certain
of the Mortgagors may be partnerships. The laws governing limited partnerships
in certain states provide that the commencement of a case under the Bankruptcy
Code with respect to a general partner will cause a person to cease to be a
general partner of the limited partnership, unless otherwise provided in
writing in the limited partnership agreement. This provision may be construed
as an "ipso facto" clause and, in the event of the general partner's
bankruptcy, may not be enforceable. To the extent described in the related
Prospectus Supplement, certain limited partnership agreements of the Mortgagors
may provide that the commencement of a case under the Bankruptcy Code with
respect to the related general partner constitutes an event of withdrawal
(assuming the enforceability of the clause is not challenged in bankruptcy
proceedings or, if challenged, is upheld) that might trigger the dissolution of
the limited partnership, the winding up of its affairs and the distribution of
its assets, unless (i) at the time there was at least one other general partner
and the written provisions of the limited partnership agreement permit the
business of the limited partnership to be carried on by the remaining general
partner, and the general partner does so or (ii) the written provisions of the
limited partnership agreement permit the limited partners to agree within a
specified time frame (often 60 days) after such withdrawal to continue the
business of the limited partnership and to appoint one or more general partners
and the limited partners do so. In addition, the laws governing general
partnerships in certain states provide that the commencement of a case under
the Bankruptcy Code or state insolvency laws with respect to a general partner
of such partnerships triggers the dissolution of such partnership, the winding
up of its affairs and the distribution of its assets. Such state laws, however,
may not be enforceable or effective in a bankruptcy case. The dissolution of a
Mortgagor, the winding up of its affairs and the distribution of its assets
could result in an acceleration of its payment obligation under a related
Mortgage Loan, which may reduce the yield on the related Series of Certificates
in the same manner as a principal prepayment.
In addition, the bankruptcy of the general partner of a Mortgagor that
is a partnership may provide the opportunity for a trustee in bankruptcy for
such general partner, such general partner as a debtor-in-possession, or a
creditor of such general partner to obtain an order from a court consolidating
the assets and liabilities of the general partner with those of the Mortgagor
pursuant to the doctrine of substantive consolidation. In such a case, the
respective Mortgaged Property, for example, would become property of the estate
of such bankrupt general partner. Not only would the Mortgaged Property be
available to satisfy the claims of creditors of such general partner, but an
automatic stay would apply to any attempt by the Trustee to exercise remedies
with respect to such Mortgaged Property. However, such an occurrence should not
affect the Trustee's status as a secured creditor with respect to the Mortgagor
or its security interest in the Mortgaged Property.
69
<PAGE>
ENVIRONMENTAL LEGISLATION
Real property pledged as security to a lender may be subject to
unforeseen environmental liabilities. Of particular concern may be those
Mortgaged Properties which are, or have been, the site of manufacturing,
industrial or disposal activity or that are in close proximity to such
properties. Such environmental liabilities may give rise to (i) a diminution in
value of property securing any Mortgage Loan, (ii) limitation on the ability to
foreclose against such property or (iii) in certain circumstances as more fully
described below, liability for clean up costs or other remedial actions, which
liability could exceed the value of the principal balance of the related
Mortgage Loan or of such Mortgaged Property.
Under the laws of many states and to some degree under Federal law,
contamination on a property may give rise to a lien on the property for cleanup
costs. In several states, such a lien has priority over all existing liens (a
"superlien") including those of existing mortgages; in these states, the lien
of a mortgage contemplated by this transaction may lose its priority to such a
superlien.
The presence of hazardous or toxic substances, or the failure to
remediate such property properly, may adversely affect the market value of the
property, as well as the owner's ability to sell or use the real estate or to
borrow using the real estate as collateral. In addition, certain environmental
laws and common law principles govern the responsibility for the removal,
encapsulation or disturbance of asbestos containing materials ("ACMs") when
these ACMs are in poor condition or when a property with ACMs is undergoing
repair, renovation or demolition. Such laws could also be used to impose
liability upon owners and operators of real properties for release of ACMs into
the air that cause personal injury or other damage. In addition to cleanup and
natural resource damages actions brought by federal, state, and local agencies
and private parties, the presence of hazardous substances on a property may
lead to claims of personal injury, property damage, or other claims by private
plaintiffs.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), a lender may be liable either
to the government or to private parties for cleanup costs on a property
securing a loan, even if the lender does not cause or contribute to the
contamination. CERCLA imposes strict, as well as joint and several, liability
on several classes of potentially responsible parties, including current owners
and operators of the property, regardless of whether they caused or contributed
to the contamination. Many states have laws similar to CERCLA.
Lenders may be held liable under CERCLA as owners or operators.
Excluded from CERCLA's definition of "owner or operator," however, is a person
"who without participating in the management of the facility, holds indicia of
ownership primarily to protect his security interest." This exemption for
holders of a security interest such as a secured lender applies only in
circumstances where the lender acts to protect its security interest in the
contaminated facility or property. Thus, if a lender's activities encroach on
the actual management of such facility or property, the lender faces potential
liability as an "owner or operator" under CERCLA. Similarly, when a lender
forecloses and takes title to a contaminated facility or property (whether it
holds the facility or property as an investment or leases it to a third party),
the lender may incur potential CERCLA liability.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly
construed CERCLA's secured-creditor exemption. The court held that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under
CERCLA; rather, liability could attach to a lender if its involvement with the
management of the facility is broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence such decision
could be inferred from the extent of its involvement in the facility's
financial management.
On April 29, 1992, in response to the decision in Fleet Factors Corp.,
the United States Environmental Protection Agency (the "EPA") adopted a rule
interpreting and delineating CERCLA's secured-creditor exemption in EPA
enforcement proceedings. The rule attempted to define and specify the range of
permissible actions that may be undertaken by a foreclosing lender/holder of a
contaminated facility without exceeding the bounds of the
70
<PAGE>
secured- creditor exemption. The rule also attempted to specify the
circumstances under which governmental or government-appointed entities that
acquire possession or control of contaminated facilities as conservators or
receivers will be considered "involuntary" owners for purposes of CERCLA's
"innocent landowner" defense to liability. Issuance of this rule by the EPA
under CERCLA did not necessarily affect the potential for liability in actions
by either a state or a private party under CERCLA or in actions under other
federal or state laws which may impose liability on "owners or operators" but
did not incorporate the secured-creditor exemption.
The validity of the EPA rule was challenged in the U.S. Court of
Appeals for the District of Columbia in Kelley v. EPA. In an opinion issued on
February 4, 1994, the D.C. Circuit Court invalidated EPA's lender liability
rule, holding that EPA exceeded its authority in enacting the rule. The U.S.
Supreme Court denied certiorari on January 17, 1995. In response, the
Department of Justice ("DOJ") and the Agency issued a policy statement entitled
"The Effect of Superfund on Lenders That Hold Security Interests in
Contaminated Property," published in the Federal Register in Volume 60, Number
237, at pages 63517 to 63519 (December 11, 1995). That policy statement
directed parties to the voided rule as the Agency's definitive view on CERCLA's
secured creditor exemption, and stated that EPA and DOJ will generally follow
the approach of the Lender Liability Rule and its preamble when exercising
their enforcement discretion with respect to lenders.
Under the Kelley case, the secured-creditor exemption under CERCLA
will be subject to existing case law interpretations. Some of those cases have
interpreted the exemption extremely narrowly, but most of the cases since
promulgation of the EPA rule have held that a lender is entitled to the
protection of the secured-creditor exemption provided that a lender complies
with the provisions set out in the EPA rule and does not itself (or through its
agents) cause or contribute to contamination. As a result of Kelley, the cases
applying the EPA rule have little, if any, precedential value and, thus,
lenders expected a return to the narrower interpretations of the exemption. In
fact, recent judicial opinions indicate that a court facing lender liability
issues is likely to apply principles and rationale that are consistent with EPA
and DOJ's Lender Policy. See, e.g., United States v. Wallace, 893 F. Supp. 627
(N.D. Tex. 1995); Z & Z Leasing, Inc. v. Graying Reel, Inc., 873 F. Supp. 51
(E.D. Mich. 1995); Kemp Industries, Inc. v. Safety Light Corp., 857 F. Supp.
373 (D.N.J. 1994).
Finally, as part of the Omnibus Consolidated Appropriations Bill for
Fiscal Year 1997 signed by President Clinton on September 30, 1996, Congress
enacted the Asset Conservation, Lender Liability, and Deposit Insurance
Protection Act of 1996 (the "Act"). The Act includes lender and fiduciary
liability amendments to CERCLA, amendments to the secured creditor exemption
set forth in Subtitle I of RCRA, and validation of the portion of the CERCLA
Lender Liability Rule that addresses involuntary acquisitions by government
entities. The amendments made by the Act apply to all claims not finally
adjudicated as of September 30, 1996, which include all cases that are in the
process of being settled, and are generally based on the CERCLA Lender
Liability Rule. However, the amendments do not explicitly describe the steps a
lender can take to avoid liability after foreclosure.
The secured-creditor exemption does not protect a lender from
liability under CERCLA in cases where the lender arranges for disposal of
hazardous substances or for transportation of hazardous substances. The
definition of "hazardous substances" under CERCLA specifically excludes
petroleum products, and the secured-creditor exemption does not govern
liability for cleanup costs under federal laws other than CERCLA, in particular
Subtitle I of the federal Resource Conservation and Recovery Act ("RCRA"),
which regulates underground petroleum (other than heating oil) storage tanks.
However, the EPA adopted a lender liability rule for underground storage tanks
under Subtitle I of RCRA. Under such rule, a holder of a security interest in
an underground storage tank or real property containing an underground storage
tank is not considered an operator of the underground storage tank as long as
petroleum is not added to, stored in or dispensed from the tank. It should be
noted, however, that liability for cleanup of petroleum contamination may be
governed by state law, which may not provide for any specific protections for
secured creditors.
In a few states, transfer of some types of properties is conditioned
upon clean up 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 cleanup the contamination before
selling or otherwise transferring the property.
71
<PAGE>
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. While it may be more difficult to hold
a lender liable in such cases, unanticipated or uninsurable liabilities of the
borrower may jeopardize the borrower's ability to meet its loan obligations.
If a lender is or becomes liable, it may bring an action for
contribution against the owner or operator who created the environmental
hazard, but that person or entity may be bankrupt or otherwise judgment proof.
It is possible that cleanup costs could become a liability of the Trust Fund
and occasion a loss to Certificateholders in certain circumstances described
above if such remedial costs were incurred.
The related Agreement will provide that the Special Servicer, acting
on behalf of the Trustee, may not acquire title to a Mortgaged Property or take
over its operation unless the Special Servicer has previously determined, based
on a report prepared by a person who regularly conducts environmental
assessments, that: (i) such Mortgaged Property is in compliance with applicable
environmental laws, or, if not, that taking such actions as are necessary to
bring the Mortgaged Property in compliance therewith is likely to produce a
greater recovery on a present value basis, after taking into account any risks
associated therewith, than not taking such actions and (ii) there are no
circumstances present at the Mortgaged Property relating to the use, management
or disposal of any Hazardous Materials for which investigation, testing,
monitoring, containment, clean-up or remediation could be required under any
federal, state or local law or regulation. This requirement effectively
precludes enforcement of the security for the related Mortgage Note until a
satisfactory environmental inquiry is undertaken, or that, if any Hazardous
Materials are present for which such action could be required, taking such
actions with respect to the affected Mortgaged Property is reasonably likely to
produce a greater recovery on a present value basis, after taking into account
any risks associated therewith, than not taking such actions, reducing the
likelihood that a given Trust Fund will become liable for any condition or
circumstance that may give rise to any environmental claim (an "Environmental
Hazard Condition") affecting a Mortgaged Property, but making it more difficult
to realize on the security for the Mortgage Loan. However, there can be no
assurance that any environmental assessment obtained by the Special Servicer
will detect all possible Environmental Hazard Conditions, that any estimate of
the costs of effecting compliance at any Mortgaged Property and the recovery
thereon will be correct, or that the other requirements of the Agreement, even
if fully observed by the Master Servicer or Special Servicer, as the case may
be, will in fact insulate a given Trust Fund from liability for Environmental
Hazard Conditions. Any additional restrictions on acquiring titles to a
Mortgaged Property may be set forth in the related Prospectus Supplement.
The Depositor generally will not have determined whether environmental
assessments have been conducted with respect to the Mortgaged Properties
relating to the Mortgage Loans included in the Mortgage Pool for a Series, and
it is likely that any environmental assessments which would have been conducted
with respect to any of the Mortgaged Properties would have been conducted at
the time of the origination of the related Mortgage Loans and not thereafter.
"Hazardous Materials" are generally defined under several federal and
state statutes, and include dangerous toxic or hazardous pollutants, chemicals,
wastes or substances, including, without limitation, those so identified
pursuant to CERCLA, and specifically including, asbestos and asbestos
containing materials, polychlorinated biphenyls, radon gas, petroleum and
petroleum products and urea formaldehyde.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE
Certain of the Mortgage Loans may contain due-on-sale and
due-on-encumbrance clauses. These clauses generally provide that the lender may
accelerate the maturity of the loan if the Mortgagor sells or otherwise
transfers or encumbers the mortgaged property. Certain of these clauses may
provide that, upon an attempted breach thereof by the Mortgagor of an otherwise
non-recourse loan, the Mortgagor becomes personally liable for the mortgage
debt. The enforceability of due-on-sale clauses has been the subject of
legislation or litigation in many states and, in some cases, the enforceability
of these clauses was limited or denied. However, the Garn-St Germain Depository
Institutions Act of 1982 preempts state constitutional, statutory and case law
that prohibits the enforcement of due-on-sale clauses and permits lenders to
enforce these clauses in accordance with their terms subject to certain limited
72
<PAGE>
exceptions. To the extent provided in the related Prospectus Supplement, the
Master Servicer on behalf of the Trust Fund, will determine whether to exercise
any right the Trustee may have as mortgagee to accelerate payment of any such
Mortgage Loan or to withhold its consent to any transfer or further encumbrance
in a manner consistent with the Servicing Standard.
In addition, under federal bankruptcy laws, due-on-sale clauses may
not be enforceable in bankruptcy proceedings and may, under certain
circumstances, be eliminated in any modified mortgage resulting from such
bankruptcy proceeding.
SUBORDINATE FINANCING
Where the Mortgagor encumbers mortgaged property with one or more
junior liens, the senior lender is subjected to additional risk. First, the
Mortgagor may have difficulty servicing and repaying multiple loans. In
addition, if the junior loan permits recourse to the Mortgagor (as junior loans
often do) and the senior loan does not, a Mortgagor may be more likely to repay
sums due on the junior loan than those on the senior loan. Second, acts of the
senior lender that prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the Mortgagor and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the senior
lender may lose its priority to the extent any existing junior lender is harmed
or the Mortgagor is additionally burdened. Third, if the Mortgagor defaults on
the senior loan and/or any junior loan or loans, the existence of junior loans
and actions taken by junior lenders can impair the security available to the
senior lender and can interfere with or delay the taking of action by the
senior lender. Moreover, the bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
DEFAULT INTEREST, PREPAYMENT CHARGES AND PREPAYMENTS
Forms of notes and mortgages used by lenders may contain provisions
obligating the Mortgagor to pay a late charge or additional interest if
payments are not timely made, and in some circumstances may provide for
prepayment fees or yield maintenance penalties if the obligation is paid prior
to maturity or prohibit such prepayment for a specified period. In certain
states, there are or may be specific limitations upon the late charges which a
lender may collect from a Mortgagor for delinquent payments. Certain states
also limit the amounts that a lender may collect from a Mortgagor as an
additional charge if the loan is prepaid. The enforceability, under the laws of
a number of states of provisions providing for prepayment fees or penalties
upon, or prohibition of, an involuntary prepayment is unclear, and no assurance
can be given that, at the time a Prepayment Premium is required to be made on a
Mortgage Loan in connection with an involuntary prepayment, the obligation to
make such payment, or the provisions of any such prohibition, will be
enforceable under applicable state law. The absence of a restraint on
prepayment, particularly with respect to Mortgage Loans having higher Mortgage
Interest Rates, may increase the likelihood of refinancing or other early
retirements of the Mortgage Loans.
ACCELERATION ON DEFAULT
To the extent specified in the related Prospectus Supplement, some of
the Mortgage Loans included in the Mortgage Pool for a Series will include a
"debt-acceleration" clause, which permits 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. The
equity courts of the state, however, may refuse to foreclose a mortgage or deed
of trust when an acceleration of the indebtedness would be inequitable or
unjust or the circumstances would render the acceleration unconscionable.
Furthermore, in some states, the 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.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential (including
multifamily but not other commercial) first mortgage loans originated by
certain lenders after March 31, 1980. A similar federal statute was in effect
with respect to mortgage loans made during the first three months of 1980. The
73
<PAGE>
statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted,
no Mortgage Loan originated after the date of such state action will be
eligible for inclusion in a Trust Fund unless (i) such Mortgage Loan provides
for such interest rate, discount points and charges as are permitted in such
state or (ii) such Mortgage Loan provides that the terms thereof shall be
construed in accordance with the laws of another state under which such
interest rate, discount points and charges would not be usurious and the
Mortgagor's counsel has rendered an opinion that such choice of law provision
would be given effect.
The Depositor has been advised by counsel that a court interpreting
Title V would hold that residential first mortgage loans that are originated on
or after January 1, 1980 are subject to federal preemption. Therefore, in a
state that has not taken the requisite action to reject application of Title V
or to adopt a provision limiting discount points or other charges prior to
origination of such mortgage loans, any such limitation under such state's
usury law would not apply to such mortgage loans.
Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the
interest due above the applicable limit or impose a specified penalty. Under
this statutory scheme, the borrower may cancel the recorded mortgage or deed of
trust upon paying its debt with lawful interest, and the lender may foreclose,
but only for the debt plus lawful interest. A second group of statutes is more
severe. A violation of this type of usury law results in the invalidation of
the transaction, thereby permitting the borrower to cancel the recorded
mortgage or deed of trust without any payment or prohibiting the lender from
foreclosing.
CERTAIN LAWS AND REGULATIONS; TYPES OF MORTGAGED PROPERTIES
The Mortgaged Properties will be subject to compliance with various
federal, state and local statutes and regulations. Failure to comply (together
with an inability to remedy any such failure) could result in material
diminution in the value of a Mortgage Property which could, together with the
possibility of limited alternative uses for a particular Mortgaged Property
(e.g., a nursing or convalescent home or hospital), result in a failure to
realize the full principal amount of the related Mortgage Loan. Mortgages on
Mortgaged Properties which are owned by the Mortgagor under a condominium form
of ownership are subject to the declaration, by-laws and other rules and
regulations of the condominium association. Mortgaged Properties which are
hotels or motels may present additional risk in that hotels and motels are
typically operated pursuant to franchise, management and operating agreements
which may be terminable 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 vagaries 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.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and
rules promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers which are
structural in nature from existing places of public accommodation to the extent
"readily achievable." In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the Mortgagor 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 Mortgagor as owner of landlord. Furthermore, since the "readily
achievable" standard may vary depending on the financial condition of the
74
<PAGE>
owner or landlord, a foreclosing lender who is financially more capable than
the Mortgagor of complying with the requirements of the ADA may be subject to
more stringent requirements than those to which the Mortgagor is subject.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a Mortgagor who enters military service
after the origination of such Mortgagor's Mortgage Loan (including a Mortgagor
who was in reserve status and is called to active duty after origination of the
Mortgage Loan), may not be charged interest (including fees and charges) above
an annual rate of 6% during the period of such Mortgagor's active duty status,
unless a court orders otherwise upon application of the lender. The Relief Act
applies to Mortgagors who are members of the Army, Navy, Air Force, Marines,
National Guard, Reserves, Coast Guard and officers of the U.S. Public Health
Service assigned to duty with the military. Because the Relief Act applies to
Mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related Mortgage Loan, no information can
be provided as to the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of any servicer to collect full amounts of interest
on certain of the Mortgage Loans. Any shortfalls in interest collections
resulting from the application of the Relief Act would result in a reduction of
the amounts distributable to the holders of the related Series of Certificates,
and would generally not be covered by advances or any form of Credit Support
provided in connection with such Certificates. In addition, the Relief Act
imposes limitations that would impair the ability of the servicer to foreclose
on an affected Mortgage Loan during the Mortgagor's period of active duty
status, and, under certain circumstances, during an additional three month
period thereafter. Thus, in the event that such a Mortgage Loan goes into
default, there may be delays and losses occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("Rico") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction.
The government must publish notice of the forfeiture proceeding and may give
notice to all parties "known to have an alleged interest in the property,"
including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
Rico activities.
FEDERAL INCOME TAX CONSEQUENCES
The following summary sets forth the anticipated material federal
income tax consequences of the purchase, ownership and disposition of Offered
Certificates. This summary is based on laws, regulations, including the REMIC
regulations promulgated by the Treasury Department (the "REMIC Regulations"),
rulings and decisions now in effect or (with respect to regulations) proposed,
all of which are subject to change either prospectively or retroactively. In
the opinion of Latham & Watkins and Katten Muchin & Zavis the information set
forth under this caption, "Federal Income Tax Consequences," to the extent that
it constitutes matters of law or legal conclusions, is correct in all material
respects. This summary does not address the federal income tax consequences of
an investment in Certificates applicable to all categories of investors, some
of which (for example, banks and insurance companies) may be subject to special
rules or, except as expressly indicated, to investors that do not acquire
Certificates in an initial offering. Prospective investors should consult their
tax advisors regarding the federal, state, local and any other tax consequences
to them of the purchase, ownership and disposition of Certificates.
75
<PAGE>
GENERAL
The federal income tax consequences to Certificateholders will vary
depending on whether an election is made to treat the Trust Fund, or a
segregated portion thereof, relating to a particular Series of Certificates as
a REMIC under the Code. The Prospectus Supplement for each Series of
Certificates will specify whether a REMIC election will be made.
GRANTOR TRUST FUNDS
If a REMIC election is not made and the related Prospectus Supplement
indicates that the Trust Fund will be treated as a grantor trust, Latham &
Watkins or Katten Muchin & Zavis will deliver its opinion that the Trust Fund
will not be classified as an association taxable as a corporation and that each
such Trust Fund will be classified as a grantor trust under subpart E, Part I
of subchapter J of the Code. In this case, owners of Certificates will be
treated for federal income tax purposes as owners of a portion of the Trust
Fund's assets as described below.
A........SINGLE CLASS OF GRANTOR TRUST CERTIFICATES
Characterization. The Trust Fund may be created with one class of
Grantor Trust Certificates. In this case, each Grantor Trust Certificateholder
will be treated as the owner of a pro rata undivided interest in the interest
and principal portions of the Trust Fund represented by the Grantor Trust
Certificates and will be considered the equitable owner of a pro rata undivided
interest in each of the Mortgage Assets in the Pool. In general, any amounts
received by a Grantor Trust Certificateholder in lieu of amounts due with
respect to any Mortgage Asset because of a default or delinquency in payment
will be treated for federal income tax purposes as having the same character as
the payments they replace.
Tax Treatment of Income and Expense. Each Grantor Trust
Certificateholder will be required to report on its federal income tax return
in accordance with such Grantor Trust Certificateholder's method of accounting
its pro rata share of the entire income from the Mortgage Loans in the Trust
Fund represented by Grantor Trust Certificates, including interest, original
issue discount ("OID"), if any, prepayment fees, assumption fees, any gain
recognized upon an assumption and late payment charges received by the Master
Servicer. Under Code Sections 162 or 212 each Grantor Trust Certificateholder
will be entitled to deduct its pro rata share of servicing fees, prepayment
fees, assumption fees, any loss recognized upon an assumption and late payment
charges retained by the Master Servicer, provided that such amounts are
reasonable compensation for services rendered to the Trust Fund. Grantor Trust
Certificateholders that are individuals, estates or trusts will be entitled to
deduct their share of expenses as itemized deductions only to the extent such
expenses plus all other Code Section 212 expenses exceed two percent of their
adjusted gross income. In addition, the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds the applicable amount under Code Section 68(b) (which amount will be
adjusted for inflation) will be reduced by the lesser of (i) 3% of the excess
of adjusted gross income over the applicable amount or (ii) 80% of the amount
of itemized deductions otherwise allowable for such taxable year. In general, a
Grantor Trust Certificateholder using the cash method of accounting must take
into account its pro rata share of income as and when collected by or paid to
the Master Servicer, or, with respect to original issue discount or certain
other income items for which the Certificateholder has made an election, as
such amounts are accrued by the Trust Fund on a constant interest basis, and
will be entitled to claim its pro rata share of deductions (subject to the
foregoing limitations) when such amounts are paid or such Certificateholder
would otherwise be entitled to claim such deductions had it held the Mortgage
Assets directly. A Grantor Trust Certificateholder using an accrual method of
accounting generally must take into account its pro rata share of income as
payment becomes due or is made to the Master Servicer, whichever is earlier and
may deduct its pro rata share of expense items (subject to the foregoing
limitations) when such amounts are paid or would otherwise be deductible had
the Certificateholder held the Mortgage Assets directly. If the servicing fees
paid to the Master Servicer are deemed to exceed reasonable servicing
compensation, the amount of such excess could be considered as an ownership
interest retained by the Master Servicer (or any person to whom the Master
Servicer assigned for value all or a portion of the servicing fees) in a
portion of the interest payments on the Mortgage Assets. The Mortgage Assets
would then be subject to the "coupon stripping" rules of the Code discussed
below.
76
<PAGE>
Treatment of Certain Owners. As to each Series of Certificates
evidencing an interest in a Trust Fund comprised of Mortgage Loans, counsel to
the Depositor will have advised the Depositor that, except as described below
under "B. Multiple Classes of Grantor Trust Certificates -- Treatment of
Certain Owners":
(i) a Grantor Trust Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19)
representing principal and interest payments on Mortgage Assets will
be considered to represent "loans . . . secured by an interest in real
property which is . . . residential property" within the meaning of
Code Section 7701(a)(19)(C)(v), to the extent that the Mortgage Assets
represented by that Grantor Trust Certificate are of a type described
in such Code section;
(ii) a Grantor Trust Certificate owned by a real estate investment
trust representing an interest in Mortgage Assets will be considered
to represent "real estate assets" within the meaning of Code Section
856(c)(4)(A), and interest income on the Mortgage Assets will be
considered "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B), to the
extent that the Mortgage Assets represented by that Grantor Trust
Certificate are of a type described in such Code section; and
(iii) a Grantor Trust Certificate owned by a REMIC will represent an
"obligation . . . which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3) to the extent
that the Mortgage Assets represented by that Grantor Trust Certificate
would be "qualified mortgages" or "permitted investments" within the
meaning of Code Section 860G(a).
Stripped Bonds and Coupons. Certain Trust Funds may consist of
Government Securities which constitute "stripped bonds" or "stripped coupons"
as those terms are defined in Section 1286 of the Code, and, as a result, such
assets would be subject to the stripped bond provisions of the Code. Under
these rules, such Government Securities are treated as having OID based on the
purchase price and the stated redemption price at maturity of each Government
Security. As such, Grantor Trust Certificateholders would be required to
include in income their pro rata share of the OID on each Government Security
recognized in any given year on an economic accrual basis even if the Grantor
Trust Certificateholder is a cash method taxpayer. Accordingly, the sum of the
income includible to the Grantor Trust Certificateholder in any taxable year
may exceed amounts actually received by the Certificateholder during such year.
Premium. The price paid for a Grantor Trust Certificate by a holder
will be allocated to such holder's undivided interest in each Mortgage Asset
based on each Mortgage Asset's relative fair market value, so that such
holder's undivided interest in each Mortgage Asset will have its own tax basis.
A Grantor Trust Certificateholder that is treated as acquiring an interest in
Mortgage Assets at a premium may elect to amortize such premium under a
constant interest method, provided that the underlying mortgage loans with
respect to such Mortgage Assets were originated after September 27, 1985.
Premium allocable to mortgage loans originated on or before September 27, 1985
should be allocated among the principal payments on such mortgage loans and
allowed as an ordinary deduction as principal payments are made. Amortizable
bond premium will be treated as an offset to interest income on such Grantor
Trust Certificate. The basis for such Grantor Trust Certificate will be reduced
to the extent that amortizable premium is applied to offset interest payments.
It is not clear whether a reasonable prepayment assumption should be used in
computing amortization of premium allowable under Code Section 171. A
Certificateholder that makes this election for a Mortgage Asset or any other
debt instrument that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder holds during the year of
the election or thereafter.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a Grantor Trust Certificate representing
an interest in a Mortgage Loan or a Mortgage Asset acquired at a premium should
recognize a loss if a Mortgage Loan (or an underlying mortgage loan with
respect to a Mortgage Asset) prepays in full, equal to the amount by which the
portion of the prepaid principal amount of such Mortgage Loan (or underlying
mortgage loan) that is allocable to the Certificate is less than the portion of
the adjusted basis of the Certificate that is allocable to such Mortgage Loan
(or underlying mortgage loan), if any. If a reasonable prepayment assumption is
used to amortize such premium, it appears that such a loss would be available,
if at all,
77
<PAGE>
only if prepayments have occurred at a rate faster than the reasonable assumed
prepayment rate. It is not clear whether any other adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
On December 30, 1997, the IRS issued final regulations (the
"Amortizable Bond Premium Regulations") dealing with amortizable bond premium.
These regulations generally will be effective for bonds issued or acquired on
or after March 2, 1998 (or, for holders making an election for the taxable year
that includes March 2, 1998 or any subsequent taxable year, shall apply to
bonds held on or after the first day of the taxable year of such election). The
Amortizable Bond Premium Regulations specifically do not apply to prepayable
debt instruments or any pool of debt instruments, such as the Trust Fund, the
yield on which may be affected by prepayments subject to Code Section
1272(a)(6)(C). Absent further guidance from the IRS, the Trustee intends to
account for amortizable bond premium in the manner described above. Prospective
purchasers of Certificates should consult their tax advisors regarding the
possible application of the Amortizable Bond Premium Regulations.
Original Issue Discount. The Internal Revenue Service (the "IRS") has
stated in published rulings that, in circumstances similar to those described
herein, the special rules of the Code relating to OID (currently Code Sections
1271 through 1273 and 1275) and Treasury regulations issued on January 27,
1994, as amended on June 14, 1996, under such Sections (the "OID Regulations"),
will be applicable to a Grantor Trust Certificateholder's interest in those
Mortgage Assets meeting the conditions necessary for these sections to apply.
Rules regarding periodic inclusion of OID income are applicable to mortgages of
corporations originated after May 27, 1969, mortgages of noncorporate
Mortgagors (other than individuals) originated after July 1, 1982, and
mortgages of individuals originated after March 1, 1984. Such OID could arise
by the financing of points or other charges by the originator of the mortgages
in an amount greater than a statutory de minimis exception to the extent that
the points are not currently deductible under applicable Code provisions or are
not for services provided by the lender. OID generally must be reported as
ordinary gross income as it accrues under a constant interest method. See
"--Grantor Trust Funds -- Multiple Classes of Grantor Trust Certificates --
Accrual of Original Issue Discount" below.
Market Discount. A Grantor Trust Certificateholder that is treated as
acquiring an undivided interest in Mortgage Assets may be subject to the market
discount rules of Code Sections 1276 through 1278 to the extent an undivided
interest in a Mortgage Asset is considered to have been purchased at a "market
discount." Generally, the amount of market discount is equal to the excess of
the portion of the principal amount of such Mortgage Asset allocable (or, if
such Mortgage Asset has OID, of such Mortgage Asset's revised issue price) to
such holder's undivided interest over such holder's tax basis in such interest.
Market discount with respect to a Grantor Trust Certificate will be considered
to be zero if the amount allocable to the Grantor Trust Certificate is less
than 0.25% of the Grantor Trust Certificate's stated redemption price at
maturity multiplied by the weighted average maturity remaining after the date
of purchase. Treasury regulations implementing the market discount rules have
not yet been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278. The Code provides
that any principal payment (whether a scheduled payment or a prepayment) or any
gain on disposition of a market discount bond acquired by the taxpayer after
October 22, 1986 shall be treated as ordinary income to the extent that it does
not exceed the accrued market discount at the time of such payment. The amount
of accrued market discount for purposes of determining the tax treatment of
subsequent principal payments or dispositions of the market discount bond is to
be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments the principal of which is payable in more than one installment.
While the Treasury Department has not yet issued regulations, rules described
in the relevant legislative history will apply. Under those rules, the holder
of a market discount bond may elect to accrue market discount either on the
basis of a constant interest rate or according to one of the following methods.
If a Grantor Trust Certificate is issued with OID, the amount of market
discount that accrues during any accrual period would be equal to the product
of (i) the total remaining market discount and (ii) a fraction, the numerator
of which is the OID accruing during the period and the denominator of which is
the total remaining OID at the beginning of the accrual period. For Grantor
Trust Certificates issued without OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount and (ii) a fraction, the numerator of which is the amount of
stated interest
78
<PAGE>
paid during the accrual period and the denominator of which is the total amount
of stated interest remaining to be paid at the beginning of the accrual period.
For purposes of calculating market discount under any of the above methods in
the case of instruments (such as the Grantor Trust Certificates) that provide
for payments that may be accelerated by reason of prepayments of other
obligations securing such instruments, the same prepayment assumption
applicable to calculating the accrual of OID will apply. Because the
regulations described above have not been issued, it is impossible to predict
what effect those regulations might have on the tax treatment of a Grantor
Trust Certificate purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount
also may be required to defer a portion of the excess of the interest paid or
incurred for the taxable year attributable to any indebtedness incurred or
continued to purchase or carry such Grantor Trust Certificate purchased with
market discount over the interest distributable thereon. For these purposes,
the de minimis rule referred to above applies. Any such deferred excess
interest expense would not exceed the market discount that accrues during such
taxable year and is, in general, allowed as a deduction not later than the year
in which such market discount is includible in income. The amount of any
remaining deferred deduction is to be taken into account in the taxable year in
which the Grantor Trust Certificate matures or is disposed of in a taxable
transaction. In the case of a disposition in which gain or loss is not
recognized in whole or in part, any remaining deferred deduction will be
allowed to the extent of gain recognized on the disposition. If such holder
elects to include market discount in income currently as it accrues on all
market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market discount or OID) and premium in income as interest, based on a
constant yield method. If such an election were to be made with respect to a
Grantor Trust Certificate with market discount, the Certificateholder would be
deemed to have made an election to include in income currently market discount
with respect to all other debt instruments having market discount that such
Certificateholder acquires during the year of the election or thereafter.
Similarly, a Certificateholder that makes this election for a Certificate that
is acquired at a premium will be deemed to have made an election to amortize
bond premium with respect to all debt instruments having amortizable bond
premium that such Certificateholder owns or acquires. See "--Grantor Trust
Funds -- Single Class of Grantor Trust Certificates -- Premium." The election
to accrue interest, discount and premium on a constant yield method with
respect to a Certificate is irrevocable except with the approval of the IRS.
Anti-abuse Rule. The Internal Revenue Service can apply or depart from
the rules contained in the OID Regulations as necessary or appropriate to
achieve a reasonable result where a principal purpose in structuring a Mortgage
Asset, Mortgage Loan or Grantor Trust Certificate or applying the otherwise
applicable rules is to achieve a result that is unreasonable in light of the
purposes of the applicable statutes (which generally are intended to achieve
the clear reflection of income for both issuers and holders of debt
instruments).
B. MULTIPLE CLASSES OF GRANTOR TRUST CERTIFICATES
STRIPPED BONDS AND STRIPPED COUPONS. Pursuant to Code Section 1286,
the separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all of
the principal payments results in the creation of "stripped bonds" with respect
to principal payments and "stripped coupons" with respect to interest payments.
For purposes of Code Sections 1271 through 1288, Code Section 1286 treats a
stripped bond or a stripped coupon as an obligation issued on the date that
such stripped interest is created. If a Trust Fund is created with two classes
of Grantor Trust Certificates, one class of Grantor Trust Certificates may
represent the right to principal and interest, or principal only, on all or a
portion of the Mortgage Assets (the "Stripped Bond Certificates"), while the
second class of Grantor Trust Certificates may represent the right to some or
all of the interest on such portion (the "Stripped Coupon Certificates").
Servicing fees in excess of reasonable servicing fees ("excess
servicing") will be treated under the stripped bond rules. If the excess
servicing fee is less than 100 basis points (i.e., 1% interest on the Mortgage
Asset principal balance) or the Certificates are initially sold with a de
minimis discount (assuming no prepayment assumption is required), any discount
that is not de minimis arising from a subsequent transfer of the Certificates
should be treated
79
<PAGE>
as market discount. The IRS appears to require that reasonable servicing fees
be calculated on a Mortgage Asset by Mortgage Asset basis, which could result
in some Mortgage Assets being treated as having more than 100 basis points of
interest stripped off.
Although not entirely clear, a Stripped Bond Certificate generally
should be treated as an interest in Mortgage Assets issued on the day such
Certificate is purchased for purposes of calculating any OID. Generally, if the
discount on a Mortgage Asset is larger than a de minimis amount (as calculated
for purposes of the OID rules) a purchaser of such a Certificate will be
required to accrue the discount under the OID rules of the Code. See "--Grantor
Trust Funds -- Single Class of Grantor Trust Certificates -- Original Issue
Discount." However, a purchaser of a Stripped Bond Certificate will be required
to account for any discount on the Mortgage Assets as market discount rather
than OID if either (i) the amount of OID with respect to the Mortgage Assets is
treated as zero under the OID de minimis rule when the Certificate was stripped
or (ii) no more than 100 basis points (including any amount of servicing fees
in excess of reasonable servicing fees) is stripped off of the Trust Fund's
Mortgage Assets.
The precise tax treatment of Stripped Coupon Certificates is
substantially uncertain. The Code could be read literally to require that OID
computations be made for each payment from each Mortgage Asset. Unless
subsequent clarification of such treatment requires an alternative method be
used (which method would be specified in a related Prospectus Supplement)
payments from a Mortgage Asset underlying a Stripped Coupon Certificate will be
treated as a single installment obligation subject to the OID rules of the
Code, in which case, all payments from such Mortgage Asset would be included in
the Mortgage Asset's stated redemption price at maturity for purposes of
calculating income on such Certificate under the OID rules of the Code.
It is unclear under what circumstances, if any, the prepayment of
Mortgage Assets will give rise to a loss to the holder of a Stripped Bond
Certificate purchased at a premium or a Stripped Coupon Certificate. If such
Certificate is treated as a single instrument (rather than an interest in
discrete mortgage loans) and the effect of prepayments is taken into account in
computing yield with respect to such Grantor Trust Certificate, it appears that
no loss will be available as a result of any particular prepayment unless
prepayments occur at a rate faster than the assumed prepayment rate. However,
if such Certificate is treated as an interest in discrete Mortgage Assets, or
if no prepayment assumption is used, then when a Mortgage Asset is prepaid, the
holder of such Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of such Certificate that is allocable to
such Mortgage Asset.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates
are urged to consult with their own tax advisors regarding the proper treatment
of these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Mortgage Assets of the type that
make up the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Grantor Trust
Certificates, for federal income tax purposes, will be the same as that of the
underlying Mortgage Assets. While Code Section 1286 treats a stripped
obligation as a separate obligation for purposes of the Code provisions
addressing OID, it is not clear whether such characterization would apply with
regard to these other Code sections. Although the issue is not free from doubt,
each class of Grantor Trust Certificates should be considered to represent
"real estate assets" within the meaning of Code Section 856(c)(4)(A) and
interest income attributable to Grantor Trust Certificates should be considered
to represent "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B), provided that in each case the
underlying Mortgage Assets and interest on such Mortgage Assets qualify for
such treatment. Prospective purchasers to which such characterization of an
investment in Certificates is material should consult their own tax advisors
regarding the characterization of the Grantor Trust Certificates and the income
therefrom. Grantor Trust Certificates will be "obligation[s] . . . which [are]
principally secured by an interest in real property" within the meaning of Code
Section 860G(a)(3) to the extent that the Mortgage Assets represented by that
Grantor Trust Certificate would be "qualified mortgages" or "permitted
investments" within the meaning of Code Section 860G(a). Grantor Trust
Certificates generally will be "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v) only to the extent the underlying Mortgage Assets are
secured by multifamily, nursing home, or congregate care properties.
80
<PAGE>
Grantor Trust Certificates Representing Interests in Loans Other Than
ARM Loans. The OID rules of Code Sections 1271 through 1275 will be applicable
to a Certificateholder's interest in those Mortgage Assets as to which the
conditions for the application of those sections are met. Rules regarding
periodic inclusion of OID in income are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate Mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 1, 1984. Under the OID Regulations, such OID could arise
by the charging of points by the originator of the mortgage in an amount
greater than the statutory de minimis exception, including a payment of points
that is currently deductible by the borrower under applicable Code provisions,
or under certain circumstances, by the presence of "teaser" rates on the
Mortgage Assets. OID on each Grantor Trust Certificate must be included in the
owner's ordinary income for federal income tax purposes as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, in advance of receipt of the cash attributable to such
income. The amount of OID required to be included in an owner's income in any
taxable year with respect to a Grantor Trust Certificate representing an
interest in Mortgage Assets other than Mortgage Assets with interest rates that
adjust periodically ("ARM Loans") likely will be computed as described below
under "--Accrual of Original Issue Discount." The following discussion is based
in part on the OID Regulations and in part on the provisions of the Tax Reform
Act of 1986 (the "1986 Act"). The OID Regulations generally are effective for
debt instruments issued on or after April 4, 1994, but may be relied upon as
authority with respect to debt instruments, such as the Grantor Trust
Certificates, issued after December 21, 1992. Alternatively, proposed Treasury
regulations issued December 21, 1992 may be treated as authority for debt
instruments issued after December 21, 1992 and prior to April 4, 1994, and
proposed Treasury regulations issued in 1986 and 1991 may be treated as
authority for instruments issued before December 21, 1992. In applying these
dates, the issue date of the Mortgage Assets should be used, or, in the case of
Stripped Bond Certificates or Stripped Coupon Certificates, the date such
Certificates are acquired. The holder of a Certificate should be aware,
however, that neither the proposed OID Regulations nor the OID Regulations
adequately address certain issues relevant to prepayable securities.
Under the Code, the Mortgage Assets underlying the Grantor Trust
Certificate will be treated as having been issued on the date they were
originated with an amount of OID equal to the excess of such Mortgage Asset's
stated redemption price at maturity over its issue price. The issue price of a
Mortgage Asset is generally the amount lent to the mortgagee, which may be
adjusted to take into account certain loan origination fees. The stated
redemption price at maturity of a Mortgage Asset is the sum of all payments to
be made on such Mortgage Asset other than payments that are treated as
qualified stated interest payments. The accrual of this OID, as described below
under "--Accrual of Original Issue Discount," will, in general, utilize the
original yield to maturity of the Grantor Trust Certificate calculated based on
a reasonable assumed prepayment rate for the mortgage loans underlying the
Grantor Trust Certificates (the "Prepayment Assumption"), and will take into
account events that occur during the calculation period. The Prepayment
Assumption will be determined in the manner prescribed by regulations that have
not yet been issued. The legislative history of the 1986 Act (the "Legislative
History") provides, however, that the regulations will require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the offering price of such Certificate. No representation is made that any
Certificate will prepay at the Prepayment Assumption or at any other rate. The
prepayment assumption contained in the Code literally applies only to debt
instruments collateralized by other debt instruments that are subject to
prepayment, and to pooled debt instruments that are subject to prepayment,
rather than direct ownership interests in such debt instruments, such as the
Certificates represent. However, no other legal authority provides guidance
with regard to the proper method for accruing OID on obligations that are
subject to prepayment, and, until further guidance is issued, the Master
Servicer intends to calculate and report OID under the method described below.
Accrual of Original Issue Discount. Generally, the owner of a Grantor
Trust Certificate must include in gross income the sum of the "daily portions,"
as defined below, of the OID on such Grantor Trust Certificate for each day on
which it owns such Certificate, including the date of purchase but excluding
the date of disposition. In the case of an original owner, the daily portions
of OID with respect to each component generally will be determined as set forth
under the OID Regulations. A calculation will be made by the Master Servicer or
such other entity specified in the related Prospectus Supplement of the portion
of OID that accrues during each successive monthly accrual period (or shorter
period from the date of original issue) that ends on the day in the calendar
year corresponding to each of the Distribution Dates on the Grantor Trust
Certificates (or the day prior to each such date). This will be done, in the
case of each full month accrual period, by (i) adding (a) the present value at
the end
81
<PAGE>
of the accrual period (determined by using as a discount factor the original
yield to maturity of the respective component under the Prepayment Assumption)
of all remaining payments to be received under the Prepayment Assumption on the
respective component and (b) any payments included in the stated redemption
price at maturity received during such accrual period, and (ii) subtracting
from that total the "adjusted issue price" of the respective component at the
beginning of such accrual period. The adjusted issue price of a Grantor Trust
Certificate at the beginning of the first accrual period is its issue price;
the adjusted issue price of a Grantor Trust Certificate at the beginning of a
subsequent accrual period is the adjusted issue price at the beginning of the
immediately preceding accrual period plus the amount of OID allocable to that
accrual period reduced by the amount of any payment other than a payment of
qualified stated interest made at the end of or during that accrual period. The
OID accruing during such accrual period will then be divided by the number of
days in the period to determine the daily portion of OID for each day in the
period. With respect to an initial accrual period shorter than a full monthly
accrual period, the daily portions of OID must be determined according to an
appropriate allocation under any reasonable method.
OID generally must be reported as ordinary gross income as it accrues
under a constant interest method that takes into account the compounding of
interest as it accrues rather than when received. However, the amount of OID
includible in the income of a holder of an obligation is reduced when the
obligation is acquired after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued OID, less prior
payments of principal. Accordingly, if such Mortgage Assets treated as acquired
by a Certificateholder are purchased at a price equal to the then unpaid
principal amount of such Mortgage Asset, no OID attributable to the difference
between the issue price and the original principal amount of such Mortgage
Asset (i.e., points) will be includible by such holder. Other OID on the
Mortgage Assets (e.g., that arising from a "teaser" rate) would still need to
be accrued.
Grantor Trust Certificates Representing Interests in ARM Loans. The
OID Regulations do not address the treatment of instruments such as Grantor
Trust Certificates that represent interests in ARM Loans. Additionally, the IRS
has not issued guidance under the Code's coupon stripping rules with respect to
such instruments. In the absence of any authority, the Master Servicer will
report OID on Grantor Trust Certificates attributable to ARM Loans ("Stripped
ARM Obligations") to holders in a manner it believes is consistent with the
rules described above under "--Grantor Trust Funds -- Multiple Classes of
Grantor Trust Certificates -- Grantor Trust Certificates Representing Interests
in Loans Other Than ARM Loans" and with the OID Regulations. In general,
application of these rules may require inclusion of income on a Stripped ARM
Obligation in advance of the receipt of cash attributable to such income.
Further, the addition of interest deferred by reason of negative amortization
("Deferred Interest") to the principal balance of an ARM Loan may require the
inclusion of such amount in the income of the Grantor Trust Certificateholder
when such amount accrues. Furthermore, the addition of Deferred Interest to the
Grantor Trust Certificate's principal balance will result in additional income
(including possibly OID income) to the Grantor Trust Certificateholder over the
remaining life of such Grantor Trust Certificates.
Because the treatment of Stripped ARM Obligations is uncertain,
investors are urged to consult their tax advisors regarding how income will be
includible with respect to such Certificates.
C. SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE
Sale or exchange of a Grantor Trust Certificate prior to its maturity
will result in gain or loss equal to the difference, if any, between the amount
received (other than amounts attributable to accrued but unpaid interest) and
the owner's adjusted basis in the Grantor Trust Certificate. Such adjusted
basis generally will equal the seller's purchase price for the Grantor Trust
Certificate, increased by the OID included in the seller's gross income with
respect to the Grantor Trust Certificate, and reduced by principal payments on
the Grantor Trust Certificate previously received by the seller. Such gain or
loss will be capital gain or loss to an owner for which a Grantor Trust
Certificate is a "capital asset" within the meaning of Code Section 1221, and
will be long-term or short-term depending on whether the Grantor Trust
Certificate has been owned for the long-term capital gain holding period
(currently more than one year).
The Taxpayer Relief Act of 1997 (the "Act") reduces the maximum rates
on long-term capital gains recognized on capital assets held by individual
taxpayers for more than eighteen months as of the date of disposition
82
<PAGE>
(and would further reduce the maximum rates on such gains in the year 2001 and
thereafter for certain individual taxpayers who meet specified conditions). The
capital gains rate for capital assets held by individual taxpayers for more
than twelve months but not more than eighteen months was not changed by the Act
("mid-term rate"). The Act does not change the capital gain rates for
corporations. Prospective investors should consult their own tax advisors
concerning these tax law changes.
It is possible that capital gain realized by holders of one or more
classes of Grantor Trust Certificates could be considered gain realized upon
the disposition of property that was part of a "conversion transaction." A sale
of a Grantor Trust Certificate will be part of a "conversion transaction" if
substantially all of the holder's expected return is attributable to the time
value of the holder's net investment, and (i) the holder entered the contract
to sell the Grantor Trust Certificate substantially contemporaneously with
acquiring the Grantor Trust Certificate, (ii) the Grantor Trust Certificate is
part of a straddle, (iii) the Grantor Trust Certificate is marketed or sold as
producing capital gains, or (iv) other transactions to be specified in Treasury
Regulations that have not yet been issued. If the sale or other disposition of
a Grantor Trust Certificate is part of a conversion transaction, all or any
portion of the gain realized upon the sale or other disposition would be
treated as ordinary income instead of capital gain.
Grantor Trust Certificates will be "evidences of indebtedness" within
the meaning of Code Section 582(c)(1), so that gain or loss recognized from the
sale of a Grantor Trust Certificate by a bank or a thrift institution to which
such section applies will be treated as ordinary income or loss.
D. NON-U.S. PERSONS
Generally, in the case of a Grantor Trust Certificateholder that is
not a "U.S. Person" (as defined below) and that is not holding its Certificate
in connection with a United States trade or business of such Certificateholder,
to the extent that a Grantor Trust Certificate evidences ownership in
underlying Mortgage Assets that were issued on or before July 18, 1984,
interest or OID paid by the person required to withhold tax under Code Section
1441 or 1442 to (i) an owner that is not a U.S. Person (as defined below) or
(ii) a Grantor Trust Certificateholder holding on behalf of an owner that is
not a U.S. Person will be subject to federal income tax, collected by
withholding, at a rate of 30% or such lower rate as may be provided for
interest by an applicable tax treaty. Accrued OID recognized by the owner on
the sale or exchange of such a Grantor Trust Certificate also will be subject
to federal income tax at the same rate. Generally, such payments would not be
subject to withholding to the extent that a Grantor Trust Certificate evidences
ownership in Mortgage Assets issued after July 18, 1984, by natural persons if
such Grantor Trust Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Grantor Trust
Certificateholder under penalties of perjury, certifying that such Grantor
Trust Certificateholder is not a U.S. Person and providing the name and address
of such Grantor Trust Certificateholder) except to the extent such payments are
payments of "contingent interest" or are otherwise ineligible for the portfolio
interest exemption. Additional restrictions apply to Mortgage Assets where the
Mortgagor is not a natural person in order to qualify for the exemption from
withholding. Generally, a Grantor Trust Certificateholder that is not a U.S.
Person will not be subject to federal income tax on any amount that constitutes
capital gain upon the retirement or disposition of a Grantor Trust Certificate
or a Mortgage Asset, provided the gain is not effectively connected with the
conduct of a trade or business in the U.S. by such Certificateholder or, in the
case of a Certificateholder who is a nonresident alien individual and hold the
Certificate as a capital asset, such holder is present in the U.S. for 183 days
or more in the taxable year and certain other requirements are met. Special
rules apply also to certain former citizens and residents of the U.S.
Interest paid to a Grantor Trust Certificateholder that is not a U.S.
Person that is effectively connected with a United States trade or business of
such Certificateholder will be taxed at graduated rates as if such Grantor
Trust Certificateholder were a U.S. Person, and will not be subject to
withholding if the Certificateholder gives an appropriate statement to that
effect to the Trustee in advance of such payment. In addition to the graduated
tax, effectively connected interest income received by a non-U.S. Person that
is a corporation may also be subject to an additional branch profits tax at a
rate of 30% (or such lower rate as may be specified in an applicable income tax
treaty). If capital gain derived from the sale, retirement or disposition of a
Grantor Trust Certificate is effectively connected with a U.S. trade or
business of a Grantor Trust Certificateholder that is not a U.S. Person, such
Certificateholder will be taxed on the net gain under the graduated United
States federal income tax rates applicable
83
<PAGE>
to U.S. Persons (and, with respect to corporate Grantor Trust
Certificateholders, may also be subject to branch profits tax).
If the Trust Fund acquires a United States real property interest
through foreclosure, deed in lieu of foreclosure or otherwise on a Mortgage
Asset secured by such an interest (which for this purpose includes real
property located in the United States and the Virgin Islands), a Grantor Trust
Certificateholder that is not a U.S. person will potentially be subject to
federal income tax on any gain attributable to such real property interest that
is allocable to such holder upon the earlier of the Trust Fund's disposition of
the property or such a holder's disposition of its Grantor Trust Certificate.
The amount of gain subject to tax should not exceed the amount by which the
value of the acquired property increased during the period such property was
held by the Trust Fund. The Grantor Trust Certificateholder's allocable share
of the gain generally would be taxed as though the gain were effectively
connected with a U.S. trade or business of such holder, and the purchaser would
withhold 10% of the gross amount realized on the disposition that is allocable
to the Non-U.S. Certificateholder's interest. Such amount withheld is
creditable against such Certificateholder's actual tax liability. Additionally,
to the extent a Grantor Trust Certificateholder that is not a U.S. person is
treated as owning an interest in real property acquired by foreclosure, deed in
lieu of foreclosure or otherwise, such Certificateholder would be subject to
United States federal income tax withholding at a rate of 30% (subject to
reduction under an applicable income tax treaty), on income from the property
unless such Certificateholder has in effect an election to be taxed at ordinary
U.S. tax rates on net income from all U.S. real property owned by it. An
interest in foreclosed property deemed to be acquired by a Non-U.S. Person that
owns a Grantor Trust Certificate would be includable in such individual's
estate for U.S. estate tax purposes. In addition, depending on the Trust Fund's
level of activities, its realization of gain and how long it held the
foreclosed property, such a Certificateholder may be deemed to be engaged in a
U.S. trade or business and may be required to file U.S. and state tax returns.
Non-U.S. Persons should consult their tax advisors regarding the application to
them of the foregoing rules.
As used herein, a "U.S. Person" means an individual who is a citizen
of the United States or is treated as a resident of the United States for
United States federal income tax purposes, an entity organized in or under the
laws of the United States or any political subdivision thereof treated as a
corporation or a partnership for such purposes, an estate the income of which
from sources outside the United States is includible in gross income for such
purposes regardless of its connection with the conduct of a trade or business
within the United States or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more United States persons have authority to control all substantial decisions
of the trust (and, to the extent provided in applicable Treasury regulations, a
trust that was in existence as of August 20, 1996 that elects to be treated as
a U.S. Person).
E. INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer or Trustee will furnish or make available, within
a reasonable time after the end of each calendar year, to each person who was a
Certificateholder at any time during such year, certain information to assist
in preparing federal income tax returns of Certificateholders or other
beneficial owners. If a holder, beneficial owner, financial intermediary or
other recipient of a payment on behalf of a beneficial owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, 31% backup withholding
may be required with respect to any payments to registered owners who are not
"exempt recipients." In addition, upon the sale of a Grantor Trust Certificate
to (or through) a broker, the broker must withhold 31% of the entire purchase
price, unless either (i) the broker determines that the seller is a corporation
or other exempt recipient or (ii) the seller provides, in the required manner,
certain identifying information and, in the case of a non-U.S. Person,
certifies that such seller is a Non-U.S. Person, and certain other conditions
are met. Such a sale must also be reported by the broker to the IRS, unless
either (a) the broker determines that the seller is an exempt recipient or (b)
the seller certifies its non-U.S. Person status (and certain other conditions
are met). Certification of the registered owner's non-U.S. Person status would
normally be made on IRS Form W-8 under penalties of perjury, although in
certain cases it may be possible to submit other documentary evidence. Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability.
84
<PAGE>
On October 6, 1997, the Treasury Department issued new regulations
(the "New Regulations") which make certain modifications to the withholding,
backup withholding and information reporting rules described above for non-U.S.
Persons. The New Regulations attempt to unify certification requirements and
modify reliance standards. The New Regulations will generally be effective for
payments made after December 31, 1999, subject to certain transition rules.
Prospective investors are urged to consult their own tax advisors regarding the
New Regulations.
REMICS
The Trust Fund relating to a Series of Certificates may elect to be
treated as a REMIC. Qualification as a REMIC requires ongoing compliance with
certain conditions. The REMIC must fulfill an asset test, which requires that
no more than a de minimis amount of the assets of the REMIC, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the Certificates by the REMIC
(the "REMIC Certificates") and at all times thereafter, may consist of assets
other than "qualified mortgages" and "permitted investments." A "qualified
mortgage" for REMIC purposes is any obligation (including certificates of
participation in such an obligation) that is principally secured by an interest
in real property and that is transferred to the REMIC within a prescribed time
period in exchange for regular or residual interests in the REMIC. The REMIC
Regulations provide a "safe harbor" pursuant to which the de minimis
requirement will be met if at all times the aggregate adjusted basis of any
nonqualified assets (i.e., assets other than qualified mortgages and permitted
investments) is less than 1% of the aggregate adjusted basis of all the REMIC's
assets. Although a REMIC is not generally subject to federal income tax (see,
however "--REMICs -- Taxation of Owners of REMIC Residual Certificates" and
"--Prohibited Transactions and Other Taxes" below), if a Trust Fund with
respect to which a REMIC election is made fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable year,
including the implementation of restrictions on the purchase and transfer of
the residual interests in a REMIC as described below under "--REMICs --
Taxation of Owners of REMIC Residual Certificates," the Code provides that a
Trust Fund will not be treated as a REMIC for such year and thereafter. In that
event, the classification of the REMIC for federal income tax purposes is
uncertain. The REMIC might be entitled to treatment as a grantor trust under
the rules described above under "--Grantor Trust Funds". In that case, no
entity-level tax would be imposed on the REMIC. Alternatively, the REMIC
Regular Certificates may continue to be treated as debt instruments for federal
income tax purposes; but the REMIC pool could be treated as a taxable mortgage
pool (a "TMP"). If the REMIC is treated as a TMP, any residual income of the
REMIC (i.e., income from the Mortgage Loans less interest and OID expense
allocable to the REMIC Regular Certificates and any administrative expenses of
the REMIC to the extent deductible) would be subject to corporate income tax at
the entity level. If such entity is taxable as a separate corporation, the
related Certificates may not be accorded the status or given the tax treatment
described below. While the Code authorizes the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of the
status of a trust fund as a REMIC, no such regulations have been issued. Any
such relief, moreover, may be accompanied by sanctions, such as the imposition
of a corporate tax on all or a portion of the REMIC's income for the period in
which the requirements for such status are not satisfied. With respect to each
Trust Fund that elects REMIC status, assuming existing law and continued
compliance with all provisions of the related Pooling and Servicing Agreement,
such Trust Fund will qualify as one or more REMICs, and the related
Certificates will be considered to be regular interests ("REMIC Regular
Certificates") or residual interests ("REMIC Residual Certificates") in a
REMIC. The related Prospectus Supplement for each Series of Certificates will
indicate whether the Trust Fund will make a REMIC election and whether a class
of Certificates will be treated as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a
REMIC election is made, (i) Certificates held by a thrift institution taxed as
a "domestic building and loan association" will constitute assets described in
Code Section 7701(a)(19)(C)(ix) only to the extent provided in the related
Prospectus Supplement (generally, to the extent the Mortgage Assets are secured
by residential real property, such as multifamily, nursing home or congregate
care properties); (ii) Certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(4)(A)
and (c)(5)(B); and (iii) interest on Certificates held by a real estate
investment trust will be considered "interest on obligations secured by
mortgages on real property" within the meaning of Code Section 856(c)(3)(B). If
less than 95% of the REMIC's assets are assets qualifying under any of the
foregoing Code sections, the Certificates will be assets described in the
foregoing Code Sections only to the extent that the REMIC's assets are
qualifying assets described in such section. In addition, payments on Mortgage
85
<PAGE>
Assets held pending distribution on the REMIC Certificates will be considered
to be "real estate assets" for purposes of Code Section 856(c). REMIC
Certificates held by a regulated investment company will not constitute
"government securities" within the meaning of Code Section 851(b)(4)(A)(i).
REMIC Certificates held by certain financial institutions will constitute an
"evidence of indebtedness" within the meaning of Code Section 582(c)(1). REMIC
Regular Certificates acquired by another REMIC on its Startup Day in exchange
for regular or residual interests in the REMIC will constitute "qualified
mortgages" within the meaning of Code Section 860G(a)(3). REMIC Regular
Certificates also will qualify as "regular interests in a REMIC" for purposes
of Code Section 860L(c)(1)(G), and may constitute a "permitted asset" of a
financial asset securitization investment trust ("FASIT").
Tiered REMIC Structures. For certain Series of Certificates, two or
more separate elections may be made to treat designated portions of the related
Trust Fund as REMICs (respectively, the "Subsidiary REMIC" or "Subsidiary
REMICs" and the "Master REMIC") for federal income tax purposes. Upon the
issuance of any such Series of Certificates, Latham & Watkins or Katten Muchin
& Zavis, counsel to the Depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Agreement,
the Master REMIC as well as any Subsidiary REMIC will each qualify as a REMIC,
and the REMIC Certificates issued by the Master REMIC and Subsidiary REMIC,
respectively, will be considered to evidence ownership of the regular interests
or residual interest in the related REMIC within the meaning of the REMIC
provisions.
Other than the residual interest in a Subsidiary REMIC, only REMIC
Certificates issued by the Master REMIC will be offered hereunder. The
Subsidiary REMIC and the Master REMIC will be treated as one REMIC solely for
purposes of determining whether (i) the REMIC Certificates will be "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Code; (ii) the REMIC
Certificates will be "loans secured by an interest in real property" under
Section 7701(a)(19)(C) of the Code; and (iii) whether the income on such
Certificates is interest described in Section 856(c)(3)(B) of the Code.
Moreover, the REMIC Regulations provide that, for purposes of Code Section
856(c)(4)(A), payments of principal and interest on the mortgage loans that are
reinvested pending distribution to holders of REMIC Certificates constitute
qualifying assets for such entities. Where two or more REMIC Pools are part of
a tiered structure they will be treated as one REMIC for purposes of the test
described above respecting asset ownership of more or less than 95%.
Notwithstanding the foregoing, however, REMIC income received by a real estate
investment trust ("REIT") owning a residual interest in a REMIC could be
treated in part as non-qualifying REIT income if the REMIC holds mortgage loans
with respect to which income is contingent on mortgagor profits or property
appreciation. In addition, if the assets of the REMIC include buy-down mortgage
loans, it is possible that the percentage of such assets constituting
"qualifying real property loans" or "loans . . . secured by an interest in real
property" for purposes of Code Section 7701(a)(19)(C)(v), may be required to be
reduced by the amount of the related buy-down funds.
A. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt
instruments issued by the REMIC and not as ownership interests in the REMIC or
its assets. However, holders of REMIC Regular Certificates that otherwise
report income under a cash method of accounting will be required to report
income with respect to REMIC Regular Certificates under an accrual method.
Original Issue Discount and Premium. The REMIC Regular Certificates
may be issued with OID. Generally, such OID, if any, will equal the difference
between the "stated redemption price at maturity" of a REMIC Regular
Certificate and its "issue price." Holders of any Class of Certificates issued
with OID will be required to include such OID in gross income for federal
income tax purposes as it accrues, in accordance with a constant interest
method based on the compounding of interest as it accrues rather than in
accordance with receipt of the interest payments. The following discussion is
based in part on the OID Regulations and in part on the provisions of the 1986
Act and Legislative History. REMIC Regular Certificateholders should be aware,
however, that the OID Regulations do not adequately address certain issues
relevant to prepayable securities, such as the REMIC Regular Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273
and 1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated
86
<PAGE>
reinvestment rate, if any, relating to the REMIC Regular Certificates and
prescribe a method for adjusting the amount and rate of accrual of such
discount where the actual prepayment rate differs from the Prepayment
Assumption. Under the Code, the Prepayment Assumption must be determined in the
manner prescribed by regulations, which regulations have not yet been issued.
The Legislative History provides, however, that Congress intended the
regulations to require that the Prepayment Assumption be the prepayment
assumption that is used in determining the initial offering price of such REMIC
Regular Certificates. The Prospectus Supplement for each Series of REMIC
Regular Certificates will specify the Prepayment Assumption to be used for the
purpose of determining the amount and rate of accrual of OID. No representation
is made that the REMIC Regular Certificates will prepay at the Prepayment
Assumption or at any other rate. Moreover, the OID Regulations include an
anti-abuse rule allowing the IRS to apply or depart from the OID Regulations
where necessary or appropriate to ensure a reasonable tax result in light of
the applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect
on the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion herein and the appropriate
method for reporting interest and original issue discount with respect to the
REMIC Regular Certificates.
In general, each REMIC Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its "issue price." The issue price
of a REMIC Regular Certificate is the first price at which a substantial amount
of REMIC Regular Certificates of that class are first sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of REMIC Regular Certificates is sold
for cash on or prior to the date of their initial issuance (the "Closing
Date"), the issue price for such class will be treated as the fair market value
of such class on the Closing Date. The issue price of a REMIC Regular
Certificate also includes the amount paid by an initial Certificateholder for
accrued interest that relates to a period prior to the issue date of the REMIC
Regular Certificate. The stated redemption price at maturity of a REMIC Regular
Certificate includes the original principal amount of the REMIC Regular
Certificate, but generally will not include distributions of interest if such
distributions constitute "qualified stated interest." Qualified stated interest
generally means interest payable at a single fixed rate or qualified variable
rate (as described below) provided that such interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the REMIC Regular Certificate. Interest is payable at a single fixed rate
only if the rate appropriately takes into account the length of the interval
between payments. Distributions of interest on REMIC Regular Certificates with
respect to which Deferred Interest will accrue will not constitute qualified
stated interest payments, and the stated redemption price at maturity of such
REMIC Regular Certificates includes all distributions of interest as well as
principal thereon.
Where the interval between the issue date and the first Distribution
Date on a REMIC Regular Certificate is longer than the interval between
subsequent Distribution Dates, the greater of any OID (disregarding the rate in
the first period) and any interest foregone during the first period is treated
as the amount by which the stated redemption price at maturity of the
Certificate exceeds its issue price for purposes of the de minimis rule
described below. The OID Regulations suggest that all interest on a long first
period REMIC Regular Certificate that is issued with non-de minimis OID, as
determined under the foregoing rule, will be treated as OID. Where the interval
between the issue date and the first Distribution Date on a REMIC Regular
Certificate is shorter than the interval between subsequent Distribution Dates,
interest due on the first Distribution Date in excess of the amount that
accrued during the first period would be added to the stated redemption price
at maturity of the Certificates. REMIC Regular Certificateholders should
consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a REMIC Regular Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this purpose, the
weighted average maturity of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the REMIC Regular Certificate and
the denominator of which is the stated redemption price at maturity of the
REMIC Regular Certificate. Although currently unclear, it appears that the
schedule of such distributions should be determined in accordance with the
87
<PAGE>
Prepayment Assumption. The Prepayment Assumption with respect to a Series of
REMIC Regular Certificates will be set forth in the related Prospectus
Supplement. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the REMIC
Regular Certificate is held as a capital asset. However, accrual method holders
may elect to accrue all de minimis OID as well as market discount under a
constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide for
certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances (the
"Super-Premium Certificates"). The income tax treatment of such REMIC Regular
Certificates is not entirely certain. For information reporting purposes, the
Trust Fund intends to take the position that the stated redemption price at
maturity of such REMIC Regular Certificates is the sum of all payments to be
made on such REMIC Regular Certificates determined under the Prepayment
Assumption, with the result that such REMIC Regular Certificates would be
issued with OID. The calculation of income in this manner could result in
negative OID (which delays future accruals of OID rather than being immediately
deductible) when prepayments on the Mortgage Assets exceed those estimated
under the Prepayment Assumption. If the Super Premium Certificates were treated
as contingent payment obligations, it is unclear how holders of those
Certificates would report income or recover their basis. The OID Regulations,
as they relate to the treatment of contingent interest, are by their terms not
applicable to Regular Certificates. However, if final regulations dealing with
contingent interest with respect to Regular Certificates apply the same
principles as the OID Regulations, such regulations may lead to different
timing of income inclusion and different characterization of any gain on the
sale of a Super-Premium Certificate than discussed above. In the alternative,
the IRS could assert that the stated redemption price at maturity of such REMIC
Regular Certificates should be limited to their principal amount (subject to
the discussion below under "--REMICs -- Taxation of Owners of REMIC Regular
Certificates -- Accrued Interest Certificates"), so that such REMIC Regular
Certificates would be considered for federal income tax purposes to be issued
at a premium. If such a position were to prevail, the rules described below
under "--REMICs -- Taxation of Owners of REMIC Regular Certificates -- Premium"
would apply. It is unclear when a loss may be claimed for any unrecovered basis
for a Super-Premium Certificate. It is possible that a holder of a
Super-Premium Certificate may claim a loss only when its remaining basis
exceeds the maximum amount of future payments, assuming no further prepayments
or when the final payment is received with respect to such Super-Premium
Certificate. Investors should consult their tax advisors regarding the
appropriate treatment of Super-Premium Certificates.
Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than a REMIC Regular Certificate based on a notional amount)
does not exceed 125% of its actual principal amount, the interest rate is not
considered disproportionately high. Accordingly, such REMIC Regular Certificate
generally should not be treated as a Super-Premium Certificate and the rules
described below under "--REMICs -- Taxation of Owners of REMIC Regular
Certificates -- Premium" should apply. However, it is possible that holders of
REMIC Regular Certificates issued at a premium, even if the premium is less
than 25% of such Certificate's actual principal balance, will be required to
amortize the premium under an OID method or contingent interest method even
though no election under Code Section 171 is made to amortize such premium.
Generally, a REMIC Regular Certificateholder must include in gross
income the "daily portions," as determined below, of the OID that accrues on a
REMIC Regular Certificate for each day a Certificateholder holds the REMIC
Regular Certificate, including the purchase date but excluding the disposition
date. In the case of an original holder of a REMIC Regular Certificate, a
calculation will be made of the portion of the OID that accrues during each
successive period ("an accrual period") that ends on the day in the calendar
year corresponding to a Distribution Date (or if Distribution Dates are on the
first day or first business day of the immediately preceding month, interest
may be treated as payable on the last day of the immediately preceding month)
and begins on the day after the end of the immediately preceding accrual period
(or on the issue date in the case of the first accrual period). This will be
done, in the case of each full accrual period, by (i) adding (a) the present
value at the end of the accrual period (determined by using as a discount
factor the original yield to maturity of the REMIC Regular Certificates as
calculated under the Prepayment Assumption) of all remaining payments to be
received on the REMIC Regular Certificates under the Prepayment Assumption and
(b) any payments included in the stated redemption price at maturity received
during such accrual period, and (ii) subtracting from that total the adjusted
issue price of the REMIC Regular Certificates at the beginning of such accrual
period. The adjusted issue price of a
88
<PAGE>
REMIC Regular Certificate at the beginning of the first accrual period is its
issue price; the adjusted issue price of a REMIC Regular Certificate at the
beginning of a subsequent accrual period is the adjusted issue price at the
beginning of the immediately preceding accrual period plus the amount of OID
allocable to that accrual period and reduced by the amount of any payment other
than a payment of qualified stated interest made at the end of or during that
accrual period. The OID accrued during an accrual period will then be divided
by the number of days in the period to determine the daily portion of OID for
each day in the accrual period. The calculation of OID under the method
described above will cause the accrual of OID to either increase or decrease
(but never below zero) in a given accrual period to reflect the fact that
prepayments are occurring faster or slower than under the Prepayment
Assumption. With respect to an initial accrual period shorter than a full
accrual period, the daily portions of OID may be determined according to an
appropriate allocation under any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID
who purchases the REMIC Regular Certificate at a cost less than the remaining
stated redemption price at maturity will also be required to include in gross
income the sum of the daily portions of OID on that REMIC Regular Certificate.
In computing the daily portions of OID for such a purchaser (as well as an
initial purchaser that purchases at a price higher than the adjusted issue
price but less than the stated redemption price at maturity), however, the
daily portion is reduced by the amount that would be the daily portion for such
day (computed in accordance with the rules set forth above) multiplied by a
fraction, the numerator of which is the amount, if any, by which the price paid
by such holder for that REMIC Regular Certificate exceeds the following amount:
(a) the sum of the issue price plus the aggregate amount of OID that would have
been includible in the gross income of an original REMIC Regular
Certificateholder (who purchased the REMIC Regular Certificate at its issue
price), less (b) any prior payments included in the stated redemption price at
maturity, and the denominator of which is the sum of the daily portions for
that REMIC Regular Certificate for all days beginning on the date after the
purchase date and ending on the maturity date computed under the Prepayment
Assumption. A holder who pays an acquisition premium instead may elect to
accrue OID by treating the purchase as a purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates
may provide for interest based on a variable rate. Interest based on a variable
rate will constitute qualified stated interest and not contingent interest if,
generally, (i) such interest is unconditionally payable at least annually, (ii)
the issue price of the debt instrument does not exceed the total noncontingent
principal payments and (iii) interest is based on a "qualified floating rate,"
an "objective rate," a combination of a single fixed rate and one or more
"qualified floating rates," one "qualified inverse floating rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such REMIC Regular
Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing
a variable rate of interest will accrue in the manner described above under
"--REMICs -- Taxation of Owners of REMIC Regular Certificates -- Original Issue
Discount and Premium" by assuming generally that the index used for the
variable rate will remain fixed throughout the term of the Certificate.
Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest
on a REMIC Regular Certificate that is a weighted average of the net interest
rates on Mortgage Loans as qualified stated interest unless an alternative
method (which would be specified in the related Prospectus Supplement) is
required based on a subsequent clarification of the treatment of interest on
weighted average rate debt instruments under the OID Regulations. In such case,
the weighted average rate used to compute the initial pass-through rate on the
REMIC Regular Certificates will be deemed to be the index in effect through the
life of the REMIC Regular Certificates. It is possible, however, that the IRS
may treat some or all of the interest on REMIC Regular Certificates with a
weighted average rate as taxable under rules similar to those relating to
obligations providing for contingent payments. Such treatment may affect the
timing of income accruals on such REMIC Regular Certificates.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market discount or OID) and premium in income as interest, based on a
constant yield method. If such an election were to be made with respect to a
REMIC Regular Certificate with market discount, the Certificateholder would be
deemed to have made an election to include in income currently market discount
with respect to all other debt instruments having market discount that such
Certificateholder acquires
89
<PAGE>
during the year of the election or thereafter. Similarly, a Certificateholder
that makes this election for a Certificate that is acquired at a premium will
be deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that such Certificateholder
owns or acquires. See "--REMICs -- Taxation of Owners of REMIC Regular
Certificates -- Premium" below. The election to accrue interest, discount and
premium on a constant yield method with respect to a Certificate is irrevocable
except with the approval of the IRS.
Market Discount. A purchaser of a REMIC Regular Certificate may also
be subject to the market discount provisions of Code Sections 1276 through
1278. Under these provisions and the OID Regulations, "market discount" equals
the excess, if any, of (i) the REMIC Regular Certificate's stated principal
amount or, in the case of a REMIC Regular Certificate with OID, the adjusted
issue price (determined for this purpose as if the purchaser had purchased such
REMIC Regular Certificate from an original holder) over (ii) the price for such
REMIC Regular Certificate paid by the purchaser. A Certificateholder that
purchases a REMIC Regular Certificate at a market discount will recognize
income upon receipt of each distribution representing amounts included in such
certificate's stated redemption price at maturity. In particular, under Section
1276 of the Code such a holder generally will be required to allocate each such
distribution first to accrued market discount not previously included in
income, and to recognize ordinary income to that extent, regardless of whether
the holder is a cash-basis or an accrual basis taxpayer. A Certificateholder
may elect to include market discount in income currently as it accrues rather
than including it on a deferred basis in accordance with the foregoing. If
made, such election will apply to all market discount bonds acquired by such
Certificateholder on or after the first day of the first taxable year to which
such election applies.
Market discount with respect to a REMIC Regular Certificate will be
considered to be zero if the amount allocable to the REMIC Regular Certificate
is less than 0.25% of such REMIC Regular Certificate's stated redemption price
at maturity multiplied by such REMIC Regular Certificate's weighted average
maturity remaining after the date of purchase. If market discount on a REMIC
Regular Certificate is considered to be zero under this rule, the actual amount
of market discount must be allocated to the remaining principal payments on the
REMIC Regular Certificate, and gain equal to such allocated amount will be
recognized when the corresponding principal payment is made. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
acquired by the taxpayer after October 22, 1986, shall be treated as ordinary
income to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest method rate or according to one of the following methods. For
REMIC Regular Certificates issued with OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount and (ii) a fraction, the numerator of which is the OID accruing
during the period and the denominator of which is the total remaining OID at
the beginning of the period. For REMIC Regular Certificates issued without OID,
the amount of market discount that accrues during a period is equal to the
product of (a) the total remaining market discount and (b) a fraction, the
numerator of which is the amount of stated interest paid during the accrual
period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the period. For purposes of
calculating market discount under any of the above methods in the case of
instruments (such as the REMIC Regular Certificates) that provide for payments
that may be accelerated by reason of prepayments of other obligations securing
such instruments, the same Prepayment Assumption applicable to calculating the
accrual of OID will apply.
90
<PAGE>
A holder who acquired a REMIC Regular Certificate at a market discount
also may be required to defer a portion of the excess of the interest paid or
incurred for the taxable year attributable to any indebtedness incurred or
continued to purchase or carry such Certificate purchased with market discount
over the interest distributable thereon. For these purposes, the de minimis
rule referred to above applies. Any such deferred excess interest expense would
not exceed the market discount that accrues during such taxable year and is, in
general, allowed as a deduction not later than the year in which such market
discount is includible in income. The amount of any remaining deferred
deduction is to be taken into account in the taxable year in which the
Certificate matures or is disposed of in a taxable transaction. In the case of
a disposition in which gain or loss is not recognized in whole or in part, any
remaining deferred deduction will be allowed to the extent of gain recognized
on the disposition. If such holder elects to include market discount in income
currently as it accrues on all market discount instruments acquired by such
holder in that taxable year or thereafter, the interest deferral rule described
above will not apply.
Premium. A purchaser of a REMIC Regular Certificate that purchases the
REMIC Regular Certificate at a cost (not including accrued qualified stated
interest) greater than its remaining stated redemption price at maturity will
be considered to have purchased the REMIC Regular Certificate at a premium and
may elect to amortize such premium under a constant yield method. A
Certificateholder that makes this election for a Certificate that is acquired
at a premium will be deemed to have made an election to amortize bond premium
with respect to all debt instruments having amortizable bond premium that such
Certificateholder holds during the year of the election or thereafter. It is
not clear whether the Prepayment Assumption would be taken into account in
determining the life of the REMIC Regular Certificate for this purpose.
However, the Legislative History states that the same rules that apply to
accrual of market discount (which rules require use of a Prepayment Assumption
in accruing market discount with respect to REMIC Regular Certificates without
regard to whether such Certificates have OID) will also apply in amortizing
bond premium under Code Section 171. The Code provides that amortizable bond
premium will be allocated among the interest payments on such REMIC Regular
Certificates and will be applied as an offset against such interest payment. On
June 27, 1996, the IRS published in the Federal Register proposed regulations
on the amortization of bond premium. The foregoing discussion is based in part
on such proposed regulations. The proposed regulations, with certain
modifications, were published in the Federal Register in final form on December
31, 1997, and such final regulations generally will be effective for bonds
acquired on or after March 2, 1998 or, for bondholders making an election to
amortize bond premium as described above for the taxable year that includes
March 2, 1998 or any subsequent taxable year, will apply to bonds held on or
after the first day of the taxable year in which the election is made. Neither
the proposed regulations nor the final regulations, by their express terms,
apply to prepayable securities described in Section 1272(a)(6)(C) of the Code,
such as the REMIC Regular Certificates. Certificateholders should consult their
tax advisors regarding the possibility of making an election to amortize any
such bond premium.
Deferred Interest. Certain classes of REMIC Regular Certificates may
provide for the accrual of Deferred Interest with respect to one or more ARM
Loans. Any Deferred Interest that accrues with respect to a class of REMIC
Regular Certificates will constitute income to the holders of such Certificates
prior to the time distributions of cash with respect to such Deferred Interest
are made. It is unclear, under the OID Regulations, whether any of the interest
on such Certificates will constitute qualified stated interest or whether all
or a portion of the interest payable on such Certificates must be included in
the stated redemption price at maturity of the Certificates and accounted for
as OID (which could accelerate such inclusion). Interest on REMIC Regular
Certificates must in any event be accounted for under an accrual method by the
holders of such Certificates and, therefore, applying the latter analysis may
result only in a slight difference in the timing of the inclusion in income of
interest on such REMIC Regular Certificates.
Effects of Defaults and Delinquencies. Certain Series of Certificates
may contain one or more classes of Subordinated Certificates, and in the event
there are defaults or delinquencies on the Mortgage Assets, amounts that would
otherwise be distributed on the Subordinated Certificates may instead be
distributed on the Senior Certificates. Subordinated Certificateholders
nevertheless will be required to report income with respect to such
Certificates under an accrual method without giving effect to delays and
reductions in distributions on such Subordinated Certificates attributable to
defaults and delinquencies on the Mortgage Assets, except to the extent that it
can be established that such amounts are uncollectible. As a result, the amount
of income reported by a Subordinated Certificateholder in any period could
significantly exceed the amount of cash distributed to such
91
<PAGE>
holder in that period. The holder will eventually be allowed a loss (or will be
allowed to report a lesser amount of income) to the extent that the aggregate
amount of distributions on the Subordinated Certificate is reduced as a result
of defaults and delinquencies on the Mortgage Assets. Timing and
characterization of such losses is discussed in "--REMICs -- Taxation of Owners
of REMIC Regular Certificates -- Treatment of Realized Losses" below.
Sale, Exchange or Redemption. If a REMIC Regular Certificate is sold,
exchanged, redeemed or retired, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale, exchange,
redemption, or retirement (other than amounts attributable to qualified stated
interest) and the seller's adjusted basis in the REMIC Regular Certificate.
Such adjusted basis generally will equal the cost of the REMIC Regular
Certificate to the seller, increased by any OID and market discount included in
the seller's gross income with respect to the REMIC Regular Certificate, and
reduced (but not below zero) by payments included in the stated redemption
price at maturity previously received by the seller and by any amortized
premium. Similarly, a holder who receives a payment that is part of the stated
redemption price at maturity of a REMIC Regular Certificate will recognize gain
equal to the excess, if any, of the amount of the payment over the holder's
adjusted basis in the REMIC Regular Certificate. A REMIC Regular
Certificateholder who receives a final payment that is less than the holder's
adjusted basis in the REMIC Regular Certificate will generally recognize a
loss. Except as provided in the following paragraph and as provided under
"--REMICs -- Taxation of Owners of REMIC Regular Certificates -- Market
Discount" above, any such gain or loss will be capital gain or loss, provided
that the REMIC Regular Certificate is held as a "capital asset" (generally,
property held for investment) within the meaning of Code Section 1221.
Gain from the sale or other disposition of a REMIC Regular Certificate
that might otherwise be capital gain will be treated as ordinary income (i) if
a REMIC Regular Certificate is held as part of a "conversion transaction" as
defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the REMIC Regular Certificateholder's net investment in the
conversion transaction at 120% of the appropriate applicable Federal rate under
Code Section 1274(d) in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with respect
to any prior disposition of property that was held as part of such transaction,
(ii) in the case of a non-corporate taxpayer, to the extent such taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains taxed
as investment income at ordinary income rates, or (iii) in the case of a REMIC
Regular Certificate to the extent that such gain does not exceed the excess, if
any, of (i) the amount that would have been includible in such holder's income
with respect to the REMIC Regular Certificate had income accrued thereon at a
rate equal to 110% of the AFR as defined in the Code Section 1274(d) determined
as of the date of purchase of such REMIC Regular Certificate, over (ii) the
amount actually includible in such holder's income.
The Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the
sale of a REMIC Regular Certificate by a bank or a thrift institution to which
such Section applies will be ordinary income or loss.
The REMIC Regular Certificate information reports will include a
statement of the adjusted issue price of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports will include
information necessary to compute the accrual of any market discount that may
arise upon secondary trading of REMIC Regular Certificates. Because exact
computation of the accrual of market discount on a constant yield method would
require information relating to the holder's purchase price which the REMIC may
not have, it appears that the information reports will only require information
pertaining to the appropriate proportionate method of accruing market discount.
Accrued Interest Certificates. Certain of the REMIC Regular
Certificates ("Payment Lag Certificates") may provide for payments of interest
based on a period that corresponds to the interval between Distribution Dates
but that ends prior to each such Distribution Date. The period between the
Closing Date for Payment Lag Certificates and their first Distribution Date may
or may not exceed such interval. Purchasers of Payment Lag Certificates for
which the period between the Closing Date and the first Distribution Date does
not exceed such interval could pay upon purchase of the REMIC Regular
Certificates accrued interest in excess of the accrued interest that would be
paid if the interest paid on the Distribution Date were interest accrued from
Distribution Date to Distribution Date.
92
<PAGE>
If a portion of the initial purchase price of a REMIC Regular Certificate is
allocable to interest that has accrued prior to the issue date ("pre-issuance
accrued interest") and the REMIC Regular Certificate provides for a payment of
stated interest on the first payment date (and the first payment date is within
one year of the issue date) that equals or exceeds the amount of the
pre-issuance accrued interest, then the REMIC Regular Certificates' issue price
may be computed by subtracting from the issue price the amount of pre-issuance
accrued interest, rather than as an amount payable on the REMIC Regular
Certificate. However, it is unclear under this method how the OID Regulations
treat interest on Payment Lag Certificates. Therefore, in the case of a Payment
Lag Certificate, the Trust Fund intends to include accrued interest in the
issue price and report interest payments made on the first Distribution Date as
interest to the extent such payments represent interest for the number of days
that the Certificateholder has held such Payment Lag Certificate during the
first accrual period.
Investors should consult their own tax advisors concerning the
treatment for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury
regulations, if the REMIC is considered to be a "single-class REMIC," a portion
of the REMIC's servicing, administrative and other non-interest expenses will
be allocated as a separate item to those REMIC Regular Certificateholders that
are "pass-through interest holders." Certificateholders that are pass-through
interest holders should consult their own tax advisors about the impact of
these rules on an investment in the REMIC Regular Certificates. See "--REMICs
- -- Taxation of Owners of REMIC Residual Certificates -- Pass-Through of
Non-Interest Expenses of the REMIC" below.
Treatment of Realized Losses. Although not entirely clear, it appears
that holders of REMIC Regular Certificates that are corporations should in
general be allowed to deduct as an ordinary loss any loss sustained during the
taxable year on account of any such Certificates becoming wholly or partially
worthless, and that, in general, holders of Certificates that are not
corporations should be allowed to deduct as a short-term capital loss any loss
sustained during the taxable year on account of any such Certificates becoming
wholly worthless. Although the matter is not entirely clear, non-corporate
holders of Certificates may be allowed a bad debt deduction at such time that
the principal balance of any such Certificate is reduced to reflect realized
losses resulting from any liquidated Mortgage Assets. The Internal Revenue
Service, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect realized losses only after all Mortgage
Assets remaining in the related Trust Fund have been liquidated or the
Certificates of the related Series have been otherwise retired. Potential
investors and holders of the Certificates are urged to consult their own tax
advisors regarding the appropriate timing, amount and character of any loss
sustained with respect to such Certificates, including any loss resulting from
the failure to recover previously accrued interest or discount income. Special
loss rules are applicable to banks and thrift institutions, including rules
regarding reserves for bad debts. Such taxpayers are advised to consult their
tax advisors regarding the treatment of losses on Certificates.
Non-U.S. Persons. Generally, payments of interest (including any
payment with respect to accrued OID) on the REMIC Regular Certificates to a
REMIC Regular Certificateholder who is not a U.S. Person (a "Non-U.S. REMIC
Regular Certificateholder") and is not engaged in a trade or business within
the United States will not be subject to federal withholding tax if (i) such
REMIC Regular Certificateholder does not actually or constructively own 10
percent or more of the combined voting power of all classes of equity in the
Issuer; (ii) such REMIC Regular Certificateholder is not a controlled foreign
corporation (within the meaning of Code Section 957) related to the Issuer; and
(iii) such REMIC Regular Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the REMIC Regular
Certificateholder under penalties of perjury, certifying that such REMIC
Regular Certificateholder is a foreign person and providing the name and
address of such REMIC Regular Certificateholder). If a non-U.S. REMIC Regular
Certificateholder is not exempt from withholding, distributions of interest to
such holder, including distributions in respect of accrued OID, may be subject
to a 30% withholding tax, subject to reduction under any applicable tax treaty.
If the interest on a REMIC Regular Certificate is effectively connected with
the conduct by the Non-U.S. REMIC Regular Certificateholder of a trade or
business within the United States, then the Non-U.S. REMIC Regular
Certificateholder will be subject to U.S. income tax at regular graduated
rates. Such a Non-U.S. REMIC Regular Certificateholder that is a corporation
for U.S. federal income tax purposes may also be subject to the branch profits
tax.
93
<PAGE>
Further, a REMIC Regular Certificate will not be included in the
estate of a nonresident alien individual and will not be subject to United
States estate taxes. However, Certificateholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
REMIC Regular Certificateholders who are not U.S. Persons and persons
related to such holders should not acquire any REMIC Residual Certificates, and
holders of REMIC Residual Certificates (the "REMIC Residual
Certificateholders") and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates without consulting their tax
advisors as to the possible adverse tax consequences of doing so.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a REMIC Regular Certificateholder at any
time during such year, certain information to assist REMIC Regular
Certificateholders in preparing their federal income tax returns, or to enable
holders to make such information available to beneficial owners or financial
intermediaries that hold such REMIC Regular Certificates on behalf of
beneficial owners. If a holder, beneficial owner, financial intermediary or
other recipient of a payment on behalf of a beneficial owner fails to supply a
certified taxpayer identification number or if the Secretary of the Treasury
determines that such person has not reported all interest and dividend income
required to be shown on its federal income tax return, 31% backup withholding
may be required with respect to any payments. Any amounts deducted and withheld
from a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax liability. In addition, upon the sale of a
Grantor Trust Certificate to (or through) a broker, the broker must withhold
31% of the entire purchase price, unless either (i) the broker determines that
the seller is a corporation or other exempt recipient or (ii) the seller
provides, in the required manner, certain identifying information and, in the
case of a non-U.S. Person, certifies that such seller is a Non-U.S. Person, and
certain other conditions are met. Such a sale must also be reported by the
broker to the IRS, unless either (a) the broker determines that the seller is
an exempt recipient or (b) the seller certifies its Non-U.S. Person status (and
certain other conditions are met). Certification of the registered owner's
Non-U.S. Person status would normally be made on IRS Form W-8 under penalties
of perjury, although in certain cases it may be possible to submit other
documentary evidence. Any amounts deducted and withheld from a distribution to
a recipient would be allowed as a credit against such recipient's federal
income tax liability.
B. TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the REMIC Residual
Certificates. The REMIC will not be subject to federal income tax except with
respect to income from prohibited transactions and certain other transactions.
See "--Prohibited Transactions and Other Taxes" below. Instead, each original
holder of a REMIC Residual Certificate will report on its federal income tax
return, as ordinary income, its share of the taxable income of the REMIC for
each day during the taxable year on which such holder owns any REMIC Residual
Certificates. The taxable income of the REMIC for each day will be determined
by allocating the taxable income of the REMIC for each calendar quarter ratably
to each day in the quarter. Such a holder's share of the taxable income of the
REMIC for each day will be based on the portion of the outstanding REMIC
Residual Certificates that such holder owns on that day. The taxable income of
the REMIC will be determined under an accrual method and will be taxable to the
holders of REMIC Residual Certificates without regard to the timing or amounts
of cash distributions by the REMIC. Ordinary income derived from REMIC Residual
Certificates will be "portfolio income" for purposes of the taxation of
taxpayers subject to the limitations on the deductibility of "passive losses."
As residual interests, the REMIC Residual Certificates will be subject to tax
rules, described below, that differ from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Certificates or as debt instruments issued by the
REMIC.
A REMIC Residual Certificateholder may be required to include taxable
income from the REMIC Residual Certificate in excess of the cash distributed.
For example, a structure where principal distributions are made serially on
regular interests (that is, a fast-pay, slow-pay structure) may generate such a
mismatching of income and cash distributions (that is, "phantom income"). This
mismatching may be caused by the use of certain required tax accounting methods
by the REMIC, variations in the prepayment rate of the underlying Mortgage
Assets and certain other factors. Depending upon the structure of a particular
transaction, the aforementioned factors may significantly reduce the after- tax
yield of a REMIC Residual Certificate to a REMIC Residual Certificateholder.
Investors should
94
<PAGE>
consult their own tax advisors concerning the federal income tax treatment of a
REMIC Residual Certificate and the impact of such tax treatment on the
after-tax yield of a REMIC Residual Certificate.
A subsequent REMIC Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such REMIC Residual Certificateholder
owns such REMIC Residual Certificate. Those daily amounts generally would equal
the amounts that would have been reported for the same days by an original
REMIC Residual Certificateholder, as described above. The Legislative History
indicates that certain adjustments may be appropriate to reduce (or increase)
the income of a subsequent holder of a REMIC Residual Certificate that
purchased such REMIC Residual Certificate at a price greater than (or less
than) the adjusted basis such REMIC Residual Certificate would have in the
hands of an original REMIC Residual Certificateholder. See "--REMICs --
Taxation of Owners of REMIC Residual Certificates -- Sale or Exchange of REMIC
Residual Certificates" below. It is not clear, however, whether such
adjustments will in fact be permitted or required and, if so, how they would be
made. The REMIC Regulations do not provide for any such adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Assets and the REMIC's other assets and (ii) the deductions allowed to
the REMIC for interest and OID on the REMIC Regular Certificates and, except as
described above under "--REMICs -- Taxation of Owners of REMIC Regular
Certificates -- Non-Interest Expenses of the REMIC," other expenses. REMIC
taxable income is generally determined in the same manner as the taxable income
of an individual using the accrual method of accounting, except that (i) the
limitations on deductibility of investment interest expense and expenses for
the production of income do not apply, (ii) all bad loans will be deductible as
business bad debts, and (iii) the limitation on the deductibility of interest
and expenses related to tax-exempt income will apply. The REMIC's gross income
includes interest, OID income, and market discount income, if any, on the
Mortgage Loans, reduced by amortization of any premium on the Mortgage Loans,
plus income on reinvestment of cash flows and reserve assets, plus any
cancellation of indebtedness income upon allocation of realized losses to the
REMIC Regular Certificates. Note that the timing of cancellation of
indebtedness income recognized by REMIC Residual Certificateholders resulting
from defaults and delinquencies on Mortgage Assets may differ from the time of
the actual loss on the Mortgage Asset. The REMIC's deductions include interest
and OID expense on the REMIC Regular Certificates, servicing fees on the
Mortgage Loans, other administrative expenses of the REMIC and realized losses
on the Mortgage Loans. The requirement that REMIC Residual Certificateholders
report their pro rata share of taxable income or net loss of the REMIC will
continue until there are no Certificates of any class of the related Series
outstanding.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the REMIC Regular Certificates and the REMIC Residual Certificates (or, if a
class of Certificates is not sold initially, its fair market value). Such
aggregate basis will be allocated among the Mortgage Assets and other assets of
the REMIC in proportion to their respective fair market value. A Mortgage Asset
will be deemed to have been acquired with discount or premium to the extent
that the REMIC's basis therein is less than or greater than its principal
balance, respectively. Any such discount (whether market discount or OID) will
be includible in the income of the REMIC as it accrues, in advance of receipt
of the cash attributable to such income, under a method similar to the method
described above for accruing OID on the REMIC Regular Certificates. The REMIC
expects to elect under Code Section 171 to amortize any premium on the Mortgage
Assets. Premium on any Mortgage Asset to which such election applies would be
amortized under a constant yield method. It is not clear whether the yield of a
Mortgage Asset would be calculated for this purpose based on scheduled payments
or taking account of the Prepayment Assumption. Additionally, such an election
would not apply to the yield with respect to any underlying mortgage loan
originated on or before September 27, 1985. Instead, premium with respect to
such a mortgage loan would be allocated among the principal payments thereon
and would be deductible by the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and OID on the
REMIC Regular Certificates. The amount and method of accrual of OID will be
calculated for this purpose in the same manner as described above with respect
to REMIC Regular Certificates except that the 0.25% per annum de minimis rule
and adjustments for subsequent holders described therein will not apply.
95
<PAGE>
A REMIC Residual Certificateholder will not be permitted to amortize
the cost of the REMIC Residual Certificate as an offset to its share of the
REMIC's taxable income. However, REMIC taxable income will not include cash
received by the REMIC that represents a recovery of the REMIC's basis in its
assets, and, as described above, the issue price of the REMIC Residual
Certificates will be added to the issue price of the REMIC Regular Certificates
in determining the REMIC's initial basis in its assets. See "--REMICs --
Taxation of Owners of REMIC Residual Certificates -- Sale or Exchange of REMIC
Residual Certificates" below. For a discussion of possible adjustments to
income of a subsequent holder of a REMIC Residual Certificate to reflect any
difference between the actual cost of such REMIC Residual Certificate to such
holder and the adjusted basis such REMIC Residual Certificate would have in the
hands of an original REMIC Residual Certificateholder, see "--REMICs --
Taxation of Owners of REMIC Residual Certificates -- Allocation of the Income
of the REMIC to the REMIC Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any
calendar quarter in which its deductions exceed its gross income. Such net loss
would be allocated among the REMIC Residual Certificateholders in the same
manner as the REMIC's taxable income. The net loss allocable to any REMIC
Residual Certificate will not be deductible by the holder to the extent that
such net loss exceeds such holder's adjusted basis in such REMIC Residual
Certificate. Any net loss that is not currently deductible by reason of this
limitation may only be used by such REMIC Residual Certificateholder to offset
its share of the REMIC's taxable income in future periods (but not otherwise).
The ability of REMIC Residual Certificateholders that are individuals or
closely held corporations to deduct net losses may be subject to additional
limitations under the Code.
Mark to Market Rules. A REMIC Residual Certificate acquired after
January 3, 1995 cannot be marked-to-market.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule,
all of the fees and expenses of a REMIC will be taken into account by holders
of the REMIC Residual Certificates. In the case of a single class REMIC,
however, the expenses and a matching amount of additional income will be
allocated, under temporary Treasury regulations, among the REMIC Regular
Certificateholders and the REMIC Residual Certificateholders on a daily basis
in proportion to the relative amounts of income accruing to each
Certificateholder on that day. In general terms, a single class REMIC is one
that either (i) would qualify, under existing Treasury regulations, as a
grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and is structured with the
principal purpose of avoiding the single class REMIC rules. The expenses of the
REMIC will be allocated to holders of the related REMIC Residual Certificates
in their entirety and not to holders of the related REMIC Regular Certificates.
In the case of individuals (or trusts, estates or other persons that
compute their income in the same manner as individuals) who own an interest in
a REMIC Regular Certificate or a REMIC Residual Certificate directly or through
a pass-through interest holder that is required to pass miscellaneous itemized
deductions through to its owners or beneficiaries (e.g., a partnership, an S
corporation or a grantor trust), such expenses will be deductible under Code
Section 67 only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's adjusted
gross income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a certain amount (the "Applicable Amount") will be reduced by the
lesser of (i) 3% of the excess of the individual's adjusted gross income over
the Applicable Amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for the taxable year. The amount of additional taxable
income recognized by REMIC Residual Certificateholders who are subject to the
limitations of either Code Section 67 or Code Section 68 may be substantial.
Further, holders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. The REMIC is required to report to
each pass-through interest holder and to the IRS such holder's allocable share,
if any, of the REMIC's non-interest expenses. The term "pass-through interest
holder" generally refers to individuals, entities taxed as individuals and
certain pass-through entities, but does not include real estate investment
trusts. REMIC Residual Certificateholders that are pass-through interest
holders should consult their own tax advisors about the impact of these rules
on an investment in the REMIC Residual Certificates.
96
<PAGE>
Excess Inclusions. A portion of the income on a REMIC Residual
Certificate (referred to in the Code as an "excess inclusion") for any calendar
quarter will be subject to federal income tax in all events. Thus, for example,
an excess inclusion (i) may not be offset by any unrelated losses, deductions
or loss carryovers of a REMIC Residual Certificateholder; (ii) will be treated
as "unrelated business taxable income" within the meaning of Code Section 512
if the REMIC Residual Certificateholder is a pension fund or any other
organization that is subject to tax only on its unrelated business taxable
income (see "--Tax-Exempt Investors" below); and (iii) is not eligible for any
reduction in the rate of withholding tax in the case of a REMIC Residual
Certificateholder that is a foreign investor. See "--Non- U.S. Persons" below.
Except as discussed in the following paragraph, with respect to any
REMIC Residual Certificateholder, the excess inclusions for any calendar
quarter is the excess, if any, of (i) the income of such REMIC Residual
Certificateholder for that calendar quarter from its REMIC Residual Certificate
over (ii) the sum of the "daily accruals" (as defined below) for all days
during the calendar quarter on which the REMIC Residual Certificateholder holds
such REMIC Residual Certificate. For this purpose, the daily accruals with
respect to a REMIC Residual Certificate are determined by allocating to each
day in the calendar quarter its ratable portion of the product of the "adjusted
issue price" (as defined below) of the REMIC Residual Certificate at the
beginning of the calendar quarter and 120 percent of the "Federal long-term
rate" in effect at the time the REMIC Residual Certificate is issued. For this
purpose, the "adjusted issue price" of a REMIC Residual Certificate at the
beginning of any calendar quarter equals the issue price of the REMIC Residual
Certificate, increased by the amount of daily accruals for all prior quarters,
and decreased (but not below zero) by the aggregate amount of payments made on
the REMIC Residual Certificate before the beginning of such quarter. The
"Federal long-term rate" is an average of current yields on Treasury securities
with a remaining term of greater than nine years, computed and published
monthly by the IRS.
As an exception to the general rule described above, the Treasury
Department has authority to issue regulations that would treat the entire
amount of income accruing on a REMIC Residual Certificate as excess inclusions
if the REMIC Residual Certificates in the aggregate are considered not to have
"significant value." The Small Business Job Protection Act ("SBJPA") of 1996
has eliminated the special rule permitting Section 593 institutions ("Thrift
Institutions") to use net operating losses and other allowable deductions to
offset their excess inclusion income from REMIC Residual Certificates that have
"significant value" within the meaning of the REMIC Regulations, effective for
taxable years beginning after December 31, 1995, except with respect to REMIC
Residual Certificates continuously held by thrift institutions since November
1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining
the effect of excess inclusions on the alternative minimum taxable income of a
REMIC Residual Certificateholder. First, alternative minimum taxable income for
a REMIC Residual Certificateholder is determined without regard to the special
rule, discussed above, that taxable income cannot be less than excess
inclusions. Second, a REMIC Residual Certificateholder's alternative minimum
taxable income for a taxable year cannot be less than the excess inclusions for
the year. Third, the amount of any alternative minimum tax net operating loss
deduction must be computed without regard to any excess inclusions. These rules
are effective for taxable years beginning after December 31, 1986, unless a
REMIC Residual Certificateholder elects to have such rules apply only to
taxable years beginning after August 20, 1996.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section 857(b)(2),
excluding any net capital gain), will be allocated among the shareholders of
such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Regulated investment companies, common trust funds and certain
cooperatives are subject to similar rules.
Payments. Any distribution made on a REMIC Residual Certificate to a
REMIC Residual Certificateholder will be treated as a non-taxable return of
capital to the extent it does not exceed the REMIC Residual Certificateholder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
exceeds such adjusted basis, it will be treated as gain from the sale of the
REMIC Residual Certificate.
97
<PAGE>
Sale or Exchange of REMIC Residual Certificates. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or
exchange and its adjusted basis in the REMIC Residual Certificate (except that
the recognition of loss may be limited under the "wash sale" rules described
below). A holder's adjusted basis in a REMIC Residual Certificate generally
equals the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder, increased by the taxable income of the REMIC that was
included in the income of such REMIC Residual Certificateholder with respect to
such REMIC Residual Certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to such REMIC Residual
Certificateholder with respect to such REMIC Residual Certificate and by the
distributions received thereon by such REMIC Residual Certificateholder. In
general, any such gain or loss will be capital gain or loss provided the REMIC
Residual Certificate is held as a capital asset. However, REMIC Residual
Certificates will be "evidences of indebtedness" within the meaning of Code
Section 582(c)(1), so that gain or loss recognized from sale of a REMIC
Residual Certificate by a bank or thrift institution to which such Section
applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other REMIC Residual Certificate, any residual
interest in another REMIC or similar interest in a "taxable mortgage pool" (as
defined in Code Section 7701(i)) during the period beginning six months before,
and ending six months after, the date of such sale, such sale will be subject
to the "wash sale" rules of Code Section 1091. In that event, any loss realized
by the REMIC Residual Certificateholder on the sale will not be deductible, but
instead will increase such REMIC Residual Certificateholder's adjusted basis in
the newly acquired asset.
C. PROHIBITED TRANSACTIONS AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions" (the "Prohibited Transactions Tax"). In
general, subject to certain specified exceptions, a prohibited transaction
means the disposition of a Mortgage Asset, the receipt of income from a source
other than a Mortgage Asset or certain other permitted investments, the receipt
of compensation for services, or gain from the disposition of an asset
purchased with the payments on the Mortgage Assets for temporary investment
pending distribution on the Certificates. It is not anticipated that the Trust
Fund for any Series of Certificates will engage in any prohibited transactions
in which it would recognize a material amount of net income.
In addition, certain contributions to a Trust Fund as to which an
election has been made to treat such Trust Fund as a REMIC made after the day
on which such Trust Fund issues all of its interests could result in the
imposition of a tax on the Trust Fund equal to 100% of the value of the
contributed property (the "Contributions Tax"). No Trust Fund for any Series of
Certificates will accept contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to
treat such Trust Fund as a REMIC may also be subject to federal income tax at
the highest corporate rate on "net income from foreclosure property,"
determined by reference to the rules applicable to real estate investment
trusts. "Net income from foreclosure property" generally means income from
foreclosure property other than qualifying income for a real estate investment
trust.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net
income from foreclosure property or state or local income or franchise tax that
may be imposed on a REMIC relating to any Series of Certificates arises out of
or results from (i) a breach of the related Servicer's, Trustee's or
Depositor's obligations, as the case may be, under the related Agreement for
such Series, such tax will be borne by such Servicer, Trustee or Depositor, as
the case may be, out of its own funds or (ii) the Depositor's obligation to
repurchase a Mortgage Loan, such tax will be borne by the Depositor. In the
event that such Servicer, Trustee or Depositor, as the case may be, fails to
pay or is not required to pay any such tax as provided above, such tax will be
payable out of the Trust Fund for such Series and will result in a reduction in
amounts available to be distributed to the Certificateholders of such Series.
98
<PAGE>
D. LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC's final tax return a date on which such adoption is deemed to occur,
and sells all of its assets (other than cash) within a 90-day period beginning
on such date, the REMIC will not be subject to any Prohibited Transaction Tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of Regular and REMIC Residual Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If a REMIC Residual Certificateholder's adjusted basis in
the REMIC Residual Certificate exceeds the amount of cash distributed to such
REMIC Residual Certificateholder in final liquidation of its interest, then it
would appear that the REMIC Residual Certificateholder would be entitled to a
loss equal to the amount of such excess. It is unclear whether such a loss, if
allowed, will be a capital loss or an ordinary loss.
E. ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code,
the REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will be
furnished quarterly to each REMIC Residual Certificateholder who held a REMIC
Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on
its return consistently with their treatment on the REMIC's return, unless the
REMIC Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting
an administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish the
REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
F. TAX-EXEMPT INVESTORS
Any REMIC Residual Certificateholder that is a pension fund or other
entity that is subject to federal income taxation only on its "unrelated
business taxable income" within the meaning of Code Section 512 will be subject
to such tax on that portion of the distributions received on a REMIC Residual
Certificate that is considered an excess inclusion. See "--REMICs -- Taxation
of Owners of REMIC Residual Certificates -- Excess Inclusions" above.
G. RESIDUAL CERTIFICATE PAYMENTS TO NON-U.S. PERSONS
Amounts paid to REMIC Residual Certificateholders who are not U.S.
Persons (see "--REMICs -- Taxation of Owners of REMIC Regular Certificates --
Non-U.S. Persons" above) are treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Amounts distributed to
holders of REMIC Residual Certificates other than Excess Inclusions should
qualify as "portfolio interest," subject to the conditions described in
"--REMICs -- Taxation of Owners of REMIC Regular Certificates" above, but only
to the extent that the underlying mortgage loans were originated after July 18,
1984. Furthermore, the rate of withholding on any income on a REMIC Residual
Certificate that is excess inclusion income will not be subject to reduction
under any applicable tax treaties. See "--REMICs -- Taxation of Owners of REMIC
Residual Certificates -- Excess Inclusions" above. If the portfolio interest
exemption is unavailable, such amount will be subject to United States
withholding tax when paid or otherwise distributed (or when the REMIC Residual
Certificate is disposed of) under rules similar to those for withholding upon
disposition of debt instruments that have OID. The Code, however, grants the
Treasury Department authority to issue regulations requiring that those amounts
be taken into account earlier than otherwise provided where necessary to
prevent avoidance of tax (for example, where the REMIC Residual Certificates do
not have significant value). See "--REMICs -- Taxation of Owners of REMIC
Residual Certificates -- Excess
99
<PAGE>
Inclusions" above. In addition, payments to REMIC Residual Certificateholders
of amounts that are "contingent interest" are ineligible for the portfolio
interest exemption. If the amounts paid to REMIC Residual Certificateholders
that are not U.S. persons are effectively connected with their conduct of a
trade or business within the United States, the 30% (or lower treaty rate)
withholding will not apply. Instead, the amounts paid to such non-U.S. Person
will be subject to U.S. federal income taxation at regular graduated rates. For
special restrictions on the transfer of REMIC Residual Certificates, see
"--Tax-Related Restrictions on Transfers of REMIC Residual Certificates" below.
REMIC Regular Certificateholders and persons related to such holders
should not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their tax
advisors as to the possible adverse tax consequences of such acquisition.
H. TAX-RELATED RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that residual
interests in such entity are not held by "disqualified organizations" (as
defined below). Further, a tax is imposed on the transfer of a residual
interest in a REMIC to a "disqualified organization." The amount of the tax
equals the product of (A) an amount (as determined under the REMIC Regulations)
equal to the present value of the total anticipated "excess inclusions" with
respect to such interest for periods after the transfer and (B) the highest
marginal federal income tax rate applicable to corporations. The tax is imposed
on the transferor unless the transfer is through an agent (including a broker
or other middleman) for a disqualified organization, in which event the tax is
imposed on the agent. The person otherwise liable for the tax shall be relieved
of liability for the tax if the transferee furnished to such person an
affidavit that the transferee is not a disqualified organization and, at the
time of the transfer, such person does not have actual knowledge that the
affidavit is false. A "disqualified organization" means (A) the United States,
any State, possession or political subdivision thereof, any foreign government,
any international organization or any agency or instrumentality of any of the
foregoing (provided that such term does not include an instrumentality if all
its activities are subject to tax and, except for FHLMC, a majority of its
board of directors is not selected by any such governmental agency), (B) any
organization (other than certain farmers' cooperatives) generally exempt from
federal income taxes unless such organization is subject to the tax on
"unrelated business taxable income" and (C) a rural electric or telephone
cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding
a residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization
is the record holder of an interest in such entity, will be relieved of
liability for the tax if such record holder furnishes to such entity an
affidavit that such record holder is not a disqualified organization and, for
such period, the pass-through entity does not have actual knowledge that the
affidavit is false. For this purpose, a "pass-through entity" means (i) a
regulated investment company, real estate investment trust or common trust
fund, (ii) a partnership, trust or estate and (iii) certain cooperatives.
Except as may be provided in Treasury regulations not yet issued, any person
holding an interest in a pass-through entity as a nominee for another will,
with respect to such interest, be treated as a pass-through entity. Electing
large partnerships (generally, non-service partnerships with 100 or more
members electing to be subject to simplified IRS reporting provisions under
Code Sections 771 through 777) will be taxable on excess inclusion income as if
all partners were disqualified organizations.
In order to comply with these rules, the Agreement will provide that
no record or beneficial ownership interest in a REMIC Residual Certificate may
be purchased, transferred or sold, directly or indirectly, without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified
100
<PAGE>
organization and is not acquiring the REMIC Residual Certificate
as a nominee or agent for a disqualified organization and (ii) a covenant by
the proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the REMIC
Residual Certificate.
Noneconomic REMIC Residual Certificates. The REMIC Regulations
disregard, for federal income tax purposes, any transfer of a Noneconomic REMIC
Residual Certificate to a "U.S. Person," as defined above, unless no
significant purpose of the transfer is to enable the transferor to impede the
assessment or collection of tax. A Noneconomic REMIC Residual Certificate is
any REMIC Residual Certificate (including a REMIC Residual Certificate with a
positive value at issuance) unless, at the time of transfer, taking into
account the Prepayment Assumption and any required or permitted clean up calls
or required liquidation provided for in the REMIC's organizational documents,
(i) the present value of the expected future distributions on the REMIC
Residual Certificate at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs and (ii) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. A significant
purpose to impede the assessment or collection of tax exists if the transferor,
at the time of the transfer, either knew or should have known that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor is presumed not to have such
knowledge if (i) the transferor conducted a reasonable investigation of the
transferee and (ii) the transferee acknowledges to the transferor that the
residual interest may generate tax liabilities in excess of the cash flow and
the transferee represents that it intends to pay such taxes associated with the
residual interest as they become due. If a transfer of a Noneconomic REMIC
Residual Certificate is disregarded, the transferor would continue to be
treated as the owner of the REMIC Residual Certificate and would continue to be
subject to tax on its allocable portion of the net income of the REMIC. The
Pooling and Servicing Agreement will require the transferee of a REMIC Residual
Certificate to state as part of the affidavit described above under
"--Tax-Related Restrictions on Transfers of REMIC Residual
Certificates--Disqualified Organizations" that such transferee (i) has
historically paid its debts as they come due, (ii) intends to continue to pay
its debts as they come due in the future; (iii) understands that, as the holder
of a noneconomic REMIC Residual Certificate, it may incur tax liabilities in
excess of any cash flows generated by the REMIC Residual Certificate as they
become due. The transferor must have no reason to believe that such statement
is untrue.
Foreign Investors. The REMIC Regulations provide that the transfer of
a REMIC Residual Certificate that has a "tax avoidance potential" to a "foreign
person" will be disregarded for federal income tax purposes. This rule appears
to apply to a transferee who is not a U.S. Person unless such transferee's
income in respect of the REMIC Residual Certificate is effectively connected
with the conduct of a United States trade or business. A REMIC Residual
Certificate is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor reasonably expects that the REMIC will distribute to
the transferee amounts that will equal at least 30 percent of each excess
inclusion, and that such amounts will be distributed at or after the time the
excess inclusion accrues and not later than the end of the calendar year
following the year of accrual. If the non-U.S. Person transfers the REMIC
Residual Certificate to a U.S. Person, the transfer will be disregarded, and
the foreign transferor will continue to be treated as the owner, if the
transfer has the effect of allowing the transferor to avoid tax on accrued
excess inclusions. The Agreement will provide that no record of beneficial
ownership interest in a REMIC Residual Certificate may be transferred, directly
or indirectly, to a non-U.S. Person unless such person provides the Trustee
with a duly completed I.R.S. Form 4224 or applicable successor I.R.S. Form and
the Trustee consents to such transfer in writing.
Any attempted transfer or pledge in violation of the transfer
restrictions shall be absolutely null and void and shall vest no rights in any
purported transferee. Investors in REMIC Residual Certificates are advised to
consult their own tax advisors with respect to transfers of the REMIC Residual
Certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a
pass-through entity.
101
<PAGE>
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
CERTIFICATEHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS RESPECTING THE PURCHASE, OWNERSHIP OR DISPOSITION OF AN INVESTMENT IN
CERTIFICATES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences," potential investors should consider the
state income tax consequences of the acquisition, ownership, and disposition of
the Offered Certificates. State income tax law may differ substantially from
the corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisors with respect to the various tax
consequences of investments in the Offered Certificates.
102
<PAGE>
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain restrictions on employee benefit plans subject to
ERISA and on any entity whose underlying assets include assets of such a plan
by reason of any such plan's investment in the entity ("ERISA Plans") and on
persons who are parties in interest or disqualified persons ("parties in
interest") with respect to such ERISA Plans. Section 4975 of the Code imposes
substantially similar prohibited transaction restrictions on tax qualified
retirement plans described in Section 401(a) of the Code and on individual
retirement accounts described in Section 408 of the Code ("Qualified Plans" and
together with ERISA Plans, "Plans"). Certain employee benefit plans, such as
governmental plans and church plans (if no election has been made under Section
410(d) of the Code), are not subject to the restrictions of ERISA, and assets
of such plans may be invested in the Certificates without regard to the ERISA
considerations described below, subject to other applicable federal and state
law. However, any such governmental or church plan which is qualified under
Section 401(a) of the Code and exempt from taxation under Section 501(a) of the
Code is subject to the prohibited transaction rules set forth in Section 503 of
the Code.
Investments by ERISA Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that an ERISA Plan's investments be made in
accordance with the documents governing the ERISA Plan.
PROHIBITED TRANSACTIONS
General
Section 406 of ERISA prohibits parties in interest with respect to an
ERISA Plan from engaging in certain transactions involving an ERISA Plan and
its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (and, in
some cases, a civil penalty may be assessed pursuant to Section 502(i) of
ERISA) on parties in interest which engage in nonexempt prohibited
transactions.
The United States Department of Labor ("Labor") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships,
trusts and certain other entities in which a Plan makes an "equity investment"
will be deemed for purposes of ERISA to be assets of the Plan unless certain
exceptions apply.
Under the terms of the regulation, the Trust may be deemed to hold
plan assets by reason of a Plan's investment in a Certificate; such plan assets
would include an undivided interest in the Mortgage Loans and any other assets
held by the Trust. In such an event, the Depositor, the Servicers, the Trustee
and other persons, in providing services with respect to the assets of the
Trust, may be parties in interest, subject to the fiduciary responsibility
provisions of Title I of ERISA, including the prohibited transaction provisions
of Section 406 of ERISA (and of Section 4975 of the Code), with respect to
transactions involving such assets unless such transactions are subject to a
statutory or administrative exemption.
The regulations contain a de minimis safe-harbor rule that exempts any
entity from plan assets status as long as the aggregate equity investment in
such entity by Plans is not significant. For this purpose, equity participation
in the entity will be significant if immediately after any acquisition of any
equity interest in the entity, "benefit plan investors" in the aggregate, own
at least 25% of the value of any class of equity interest. "Benefit plan
investors" are defined as Plans as well as employee benefit plans not subject
to ERISA (e.g., governmental plans). The 25% limitation must be met with
respect to each class of certificates, regardless of the portion of total
equity value represented by such class, on an ongoing basis.
103
<PAGE>
Availability of Underwriter's Exemption for Certificates
As specified in the related Prospectus Supplement, Labor has granted
to the Underwriter a Prohibited Transaction Exemption (the "Exemption"), which
exempts from the application of the prohibited transaction rules transactions
relating to: (1) the acquisition, sale and holding by Plans of certain
certificates representing an undivided interest in certain asset-backed
pass-through trusts, with respect to which the Underwriter or any of its
affiliates is the sole underwriter or the manager or co-manager of the
underwriting syndicate; and (2) the servicing, operation and management of such
asset-backed pass-through trusts, provided that the general conditions and
certain other conditions set forth in the Exemption and specified in the
related Prospectus Supplement are satisfied.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm (a) that the Certificates constitute "certificates" for purposes of the
Exemption and (b) that the specific and general conditions set forth in the
Exemption and the other requirements set forth in the Exemption would be
satisfied.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Certificates on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Among other things, before purchasing any
Certificates, a fiduciary of a Plan subject to the fiduciary responsibility
provisions of ERISA or an employee benefit plan subject to the prohibited
transaction provisions of the Code should make its own determination as to the
availability of the exemptive relief provided in the Exemption, and also
consider the availability of any other prohibited transaction exemptions. The
Prospectus Supplement with respect to a Series of Certificates may contain
additional information regarding the application of the Exemption, PTCE 83-1,
or any other exemption, with respect to the Certificates offered thereby.
LEGAL INVESTMENT
The Prospectus Supplement for each Series of Offered Certificates will
identify those classes of Offered Certificates, if any, which constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Such classes will constitute "mortgage
related securities" for so long as they are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization (the "SMMEA Certificates"). As "mortgage related securities," the
SMMEA Certificates will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including, but not limited to, state chartered savings banks, commercial
banks, savings and loan associations and insurance companies, as well as
trustees and state government employee retirement systems) created pursuant to
or existing under the laws of the United States or of any state (including the
District of Columbia and Puerto Rico) whose authorized investments are subject
to state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or
any agency or instrumentality thereof constitute legal investments for such
entities. Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia,
Illinois, Kansas, Maryland, Michigan, Missouri, Nebraska, New Hampshire, New
York, North Carolina, Ohio, South Dakota, Utah, Virginia and West Virginia
enacted legislation, on or before the October 4, 1991 cutoff established by
SMMEA for such enactments, limiting to varying extents the ability of certain
entities (in particular, insurance companies) to invest in mortgage related
securities, in most cases by requiring the affected investors to rely solely
upon existing state law, and not SMMEA. In addition, pursuant to the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "1994
Amendment"), Congress expanded the definition of securities entitled to the
benefits of SMMEA to include those evidencing ownership of, or secured by,
notes secured by a first lien on one or more parcels of real estate, upon which
is located one or more commercial structures. The terms of this amendment
permit states to prohibit or limit, by specific legislation, the authority of
persons, trusts, corporations, partnerships, associations, business trusts or
business entities to purchase, hold or invest, in securities evidencing
ownership of, or secured by, such notes to the extent predicated on the
expansion of SMMEA. The 1994 Amendment permits enactment of such restrictions
until September 23, 2001. It provides, however, that no enactment will affect
the validity of a contractual commitment to purchase, hold or invest in
securities made before such enactment, or require sale of any securities
previously acquired. The Prospectus Supplement for each Series
104
<PAGE>
will identify the states, if any, that have enacted any such limitations
through the date of the Prospectus Supplement. Enactment of such restrictions
could adversely affect the liquidity of any Offered Certificates entitled to
the benefits of SMMEA solely by reason of the 1994 Amendment. Accordingly, the
investors affected by such legislation will be authorized to invest in SMMEA
Certificates only to the extent provided in such legislation. Accordingly,
investors whose investment authority is subject to legal restrictions should
consult their own legal advisors to determine whether and to what extent the
Offered Certificates constitute legal investments for them.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.
Institutions where investment activities are subject to legal
investment laws or regulations or review by certain regulatory authorities may
be subject to restrictions on investment in certain classes of Offered
Certificates. Any financial institution which is subject to the jurisdiction of
the Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation ("FDIC"), the Office of
Thrift Supervision ("OTS"), the National Credit Union Administration ("NCUA")
or other federal or state agencies with similar authority should review any
applicable rules, guidelines and regulations prior to purchasing any Offered
Certificate. The Federal Financial Institutions Examination Council, for
example, has issued a Supervisory Policy Statement on Securities Activities
effective February 10, 1992 (the "Policy Statement"). The Policy Statement has
been adopted by the Comptroller of the Currency, the Federal Reserve Board, the
FDIC, the OTS and the NCUA (with certain modifications), with respect to the
depository institutions that they regulate. The Policy Statement prohibits
depository institutions from investing in certain "high-risk mortgage
securities" (including securities such as certain classes of Offered
Certificates), except under limited circumstances, and sets forth certain
investment practices deemed to be unsuitable for regulated institutions. The
NCUA issued final regulations effective December 2, 1991 that restrict and in
some instances prohibit the investment by federal credit unions in certain
types of mortgage related securities.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the "Model Law") which sets forth model
investment guidelines for the insurance industry. Institutions subject to
insurance regulatory authorities may be subject to restrictions on investment
similar to those set forth in the Model Law and other restrictions.
The appropriate characterization under various legal investment
restrictions of those Offered Certificates that do not constitute "mortgage
related securities" under SMMEA, and thus the ability of investors subject to
these restrictions to purchase such Offered Certificates, may be subject to
significant interpretive uncertainties.
Notwithstanding SMMEA, there may be other restrictions on the ability
of certain investors, including depository institutions, either to purchase any
Offered Certificates or to purchase Offered Certificates representing more than
a specified percentage of the investors' assets.
Except as to the status of SMMEA Certificates identified in the
Prospectus Supplement for a Series as "mortgage related securities" under
SMMEA, the Depositor will make no representations as to the proper
characterization of the Certificates for legal investment or financial
institution regulatory purposes, or as to the ability of particular investors
to purchase any Offered Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Certificates) may adversely affect the liquidity of the
Certificates.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
105
<PAGE>
to, "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Certificates or
to purchase Offered Certificates representing more than a specified percentage
of the investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Offered Certificates constitute
legal investments for such investors.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus
Supplements will be offered in series through one or more of the methods
described below. The Prospectus Supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the Depositor from such sale.
The Depositor intends that Offered Certificates will be offered
through the following methods from time to time and that offerings may be made
concurrently through more than one of these methods or that an offering of the
Offered Certificates of a particular series may be made through a combination
of two or more of these methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. By placements by the Depositor with institutional investors through
dealers; and
3. By direct placements by the Depositor with institutional investors.
In addition, if specified in the related Prospectus Supplement, the
Offered Certificates of a series may be offered in whole or in part to the
seller of the related Mortgage Assets that would comprise the Trust Fund for
such Certificates.
If underwriters are used in a sale of any Offered Certificates (other
than in connection with an underwriting on a best efforts basis), such
Certificates will be acquired by the underwriters for their own account and may
be resold from time to time in one or more transactions, including negotiated
transactions, at fixed public offering prices or at varying prices to be
determined at the time of sale or at the time of commitment therefor. Such
underwriters may be broker-dealers affiliated with the Depositor whose
identities and relationships to the Depositor will be as set forth in the
related Prospectus Supplement. The managing underwriter or underwriters with
respect to the offer and sale of Offered Certificates of a particular series
will be set forth on the cover of the Prospectus Supplement relating to such
series and the members of the underwriting syndicate, if any, will be named in
such Prospectus Supplement.
In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of the Offered
Certificates in the form of discounts, concessions or commissions. Underwriters
and dealers participating in the distribution of the Offered Certificates may
be deemed to be underwriters in connection with such Certificates, and any
discounts or commissions received by them from the Depositor and any profit on
the resale of Offered Certificates by them may be deemed to be underwriting
discounts and commissions under the Securities Act.
It is anticipated that the underwriting agreement pertaining to the
sale of the Offered Certificates of any series will provide that the
obligations of the underwriters will be subject to certain conditions
precedent, that the underwriters will be obligated to purchase all such
Certificates if any are purchased (other than in connection with an
underwriting on a best efforts basis) and that, in limited circumstances, the
Depositor will indemnify the several underwriters and the underwriters will
indemnify the Depositor against certain civil liabilities, including
liabilities under the Securities Act or will contribute to payments required to
be made in respect thereof.
106
<PAGE>
The Prospectus Supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of
such offering and any agreements to be entered into between the Depositor and
purchasers of Offered Certificates of such series.
The Depositor anticipates that the Certificates offered hereby will be
sold primarily to institutional investors. Purchasers of Offered Certificates,
including dealers, may, depending on the facts and circumstances of such
purchases, be deemed to be "underwriters" within the meaning of the Securities
Act in connection with reoffers and sales by them of Offered Certificates.
Holders of Offered Certificates should consult with their legal advisors in
this regard prior to any such reoffer or sale.
LEGAL MATTERS
Certain legal matters in connection with the Certificates, including
certain federal income tax consequences, will be passed upon for the Depositor
by Latham & Watkins, New York, New York or by Katten, Muchin & Zavis, Chicago,
Illinois.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Certificates and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in
one of the four highest rating categories, by a Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood
of receipt by certificateholders of all distributions on the underlying
mortgage loans. These ratings address the structural, legal and issuer-related
aspects associated with such certificates, the nature of the underlying
mortgage loans and the credit quality of the guarantor, if any. Ratings on
mortgage pass-through certificates do not represent any assessment of the
likelihood of principal prepayments by Mortgagors or of the degree by which
such prepayments might differ from those originally anticipated. As a result,
certificateholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might fail
to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
107
<PAGE>
INDEX OF DEFINED TERMS
1986 Act..................................................................81
1994 Amendment...........................................................104
Accounts..................................................................46
Accrual Certificates..................................................11, 34
Accrued Certificate Interest..............................................35
ACMs......................................................................70
Act...................................................................71, 82
ADA.......................................................................74
Agreements................................................................10
Amortizable Bond Premium Regulations......................................78
Applicable Amount.........................................................96
ARM Loans.............................................................27, 81
Asset Seller..............................................................24
Available Distribution Amount.............................................35
Balloon Mortgage Loans....................................................20
Bankruptcy Code...........................................................66
Book-Entry Certificates...................................................34
Cash Flow Agreement................................................1, 10, 30
Cede...................................................................3, 41
CEDEL Participants........................................................42
CERCLA................................................................22, 70
Certificate.........................................................1, 7, 43
Certificate Balance...................................................10, 36
Certificateholders........................................................23
Closing Date..............................................................87
CMBS................................................................1, 7, 24
CMBS Agreement............................................................28
CMBS Issuer...............................................................28
CMBS Servicer.............................................................28
CMBS Trustee..............................................................28
Code......................................................................13
Collection Accounts........................................................9
Commercial Loans..........................................................24
Commercial Properties..................................................8, 24
Commission.................................................................3
Cooperative.......................................................24, 42, 62
Cooperative Loans.........................................................62
Covered Trust.........................................................21, 58
CPR.......................................................................32
Credit Support......................................................1, 9, 29
Crime Control Act.........................................................75
Cut-Off Date..............................................................12
Debt Service Coverage Ratio...............................................25
Deferred Interest.........................................................82
Definitive Certificates...............................................34, 42
Depositaries..............................................................40
Depositor..............................................................7, 24
Determination Date........................................................35
Distribution Account......................................................48
Distribution Date.........................................................11
DOJ.......................................................................71
108
<PAGE>
DTC....................................................................3, 42
Environmental Hazard Condition............................................72
EPA.......................................................................70
Equity Participations.....................................................28
ERISA................................................................16, 103
ERISA Plans..............................................................103
Euroclear Operator........................................................42
Euroclear Participants....................................................42
Event of Default..........................................................55
Exchange Act...............................................................3
FDIC.....................................................................105
Grantor Trust Certificates................................................13
Hazardous Materials.......................................................72
Hyper-Amortization Date...............................................20, 33
Hyper-Amortization Loans..........................................20, 28, 33
Indirect Participants.....................................................41
Insurance Proceeds........................................................46
IRS.......................................................................78
L/C Bank..................................................................59
Labor....................................................................103
Lease...................................................................3, 8
Lease Assignment...........................................................1
Legislative History.......................................................81
Lessee..................................................................3, 8
Loan-to-Value Ratio.......................................................26
Lock-out Date.............................................................28
Lock-out Period...........................................................28
Master REMIC..............................................................86
Master Servicer............................................................7
Model Law................................................................105
Mortgage Assets........................................................1, 24
Mortgage Interest Rate..................................................8 28
Mortgage Loan.......................................................1, 7, 24
Mortgage Notes............................................................24
Mortgaged Properties.......................................................8
Mortgages.................................................................24
Mortgagor.................................................................60
Multifamily Loans.........................................................24
Multifamily Properties.................................................8, 24
NCUA.....................................................................105
Net Operating Income......................................................25
New Regulations...........................................................85
Nonrecoverable Advance....................................................37
Notes.....................................................................13
Offered Certificates.......................................................1
OID.......................................................................76
OID Regulations...........................................................78
Originator................................................................24
OTS......................................................................105
Partnership...............................................................13
Partnership Interest......................................................13
Pass-Through Rate.....................................................10, 35
Permitted Investments.....................................................46
109
<PAGE>
Plans....................................................................103
Policy Statement.........................................................105
Pre-Funded Account........................................................29
Prepayment Assumption.....................................................81
Prepayment Premium........................................................28
Prohibited Transactions Tax...............................................98
Prospectus Supplement......................................................1
Purchase Price............................................................45
qualified mortgage........................................................85
Qualified Plans..........................................................103
Rating Agency.............................................................16
RCRA......................................................................71
Record Date...............................................................34
Refinance Loans...........................................................27
REIT......................................................................86
Related Proceeds..........................................................37
Relief Act................................................................75
REMIC..................................................................2, 13
REMIC Certificates........................................................85
REMIC Regular Certificates............................................13, 85
REMIC Regulations.........................................................75
REMIC Residual Certificateholders.........................................94
REMIC Residual Certificates...........................................13, 85
Retained Interest.........................................................53
Rico......................................................................75
Risk Factors...............................................................7
Rules.....................................................................41
SBJPA.....................................................................97
Securities Act.............................................................3
Senior Certificates...................................................11, 34
Series..................................................................1, 8
Servicer..................................................................12
Servicing Standard........................................................48
Servicing Transfer Event..................................................49
SMMEA....................................................................104
SMMEA Certificates.......................................................104
Special Servicer...........................................................7
Specially Serviced Mortgage Loan..........................................49
Startup Day...............................................................85
Stripped ARM Obligations..................................................82
Stripped Bond Certificates................................................79
Stripped Coupon Certificates..............................................79
Stripped Interest Certificates........................................11, 34
Stripped Principal Certificates.......................................11, 34
Subordinate Certificates..............................................11, 34
Sub-Servicer..............................................................49
Sub-Servicing Agreement...................................................49
Subsidiary REMIC..........................................................86
Super-Premium Certificates................................................88
Thrift Institutions.......................................................97
Title V...................................................................73
TMP.......................................................................85
Trust Assets...............................................................3
110
<PAGE>
Trust Fund.................................................................1
Trust Partnership.........................................................15
Trustee....................................................................7
U.S. Person......................................................83, 84, 101
UCC.......................................................................40
Underlying CMBS...........................................................24
Underlying Mortgage Loan..................................................24
Value.....................................................................27
Voting Rights.............................................................23
Warranting Party......................................................17, 44
Whole Loans...............................................................24
111
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
================================================================= =====================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE $
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR (APPROXIMATE)
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR OR BY THE
UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER HELLER FINANCIAL COMMERCIAL MORTGAGE ASSET CORP.
TO BUY, THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY
JURISDICTION IN WHICH THE PERSON MAKING SUCH OFFER OR -----------
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT
IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
AN IMPLICATION THAT INFORMATION HEREIN OR THEREIN IS CORRECT AS
OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS.
____________________ CLASS A1, CLASS A1X, CLASS A2,
CLASS A2X, CLASS B, CLASS C,
TABLE OF CONTENTS CLASS BCX, CLASS D AND CLASS E
MORTGAGE PASS-THROUGH
PAGE CERTIFICATES
SERIES 199 -
PROSPECTUS SUPPLEMENT
Summary of Prospectus Supplement........
Risk Factors............................
Description of the Mortgage Pool........
Description of the Certificates.........
Certain Prepayment, Maturity and Yield
Considerations........................
Servicing...............................
Description of the Pooling and Servicing
Agreement.............................
Use of Proceeds.........................
Federal Income Tax Consequences.........
State Tax Considerations................
ERISA Considerations....................
Legal Investment........................
Method of Distribution..................
Legal Matters...........................
Rating..................................
Index of Principal Definitions..........
Annex A: Certain Characteristics of The
Mortgage Loans........................
Annex B: Form of Monthly Report
PROSPECTUS ___________________
Prospectus Supplement...................
Available Information................... PROSPECTUS SUPPLEMENT
Incorporation of Certain Information by
Reference............................. _______________________
Summary of Prospectus...................
Risk Factors............................
Description of the Trust Funds..........
Use of Proceeds.........................
Yield Considerations....................
The Depositor...........................
Description of the Certificates.........
Description of the Agreements...........
Description of Credit Support...........
Certain Legal Aspects of Mortgage
Loans and the Leases..................
Federal Income Tax Consequences.........
State Tax Considerations................
ERISA Considerations....................
Legal Investment........................ , 199
Method of Distribution..................
Legal Matters...........................
Financial Information...................
Rating..................................
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED TO BE IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION**
Estimated expenses in connection with the issuance and distribution of
the securities, other than underwriting discounts and commissions*, are as
follows:
Registration Fee -- Securities and Exchange
Commission..................................... $590,000
Printing and Engraving Expenses.................. 50,000
Accounting Fees and Expenses..................... 40,000
Legal Fees and Expenses.......................... 200,000
Trustee Fees and Expenses........................ 25,000
Rating Agency Fees............................... 60,000
Miscellaneous Expenses........................... 35,000
------
Total.................................. $1,000,000
=========
- ----------
* To be provided for each Series of Securities on the cover page of the
related Prospectus Supplement.
** All amounts except the SEC Registration Fee are estimates of expenses
incurred or to be incurred in connection with the issuance and
distribution of a single Series of Certificates in an aggregate
principal amount assumed for these purposes to be equal to
$100,000,000 of Certificates registered hereby.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the proposed form of Underwriting Agreement to be filed as
Exhibit 1.1 hereto, the Underwriter will be obligated under certain
circumstances to indemnify officers and directors of Heller Financial
Commercial Mortgage Asset Corp. (the "Company") who sign the Registration
Statement, and certain controlling persons of the Company, against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
and the Securities Exchange Act of 1934, as amended.
The Company's Certificate of Incorporation provides for
indemnification of directors and officers of the Company to the full extent
permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides, in
substance, that Delaware corporations shall have the power, under specified
circumstances, to indemnify their directors, officers, employees and agents in
connection with actions, suits or proceedings brought against them by a third
party or in the right of the corporation, by reason of the fact that they are
or were such directors, officers, employees or agents, against expenses,
judgments, fines and amounts paid in settlement actually and reasonably
incurred in any such action, suit or proceeding. The Delaware General
Corporation Law also provides that the Registrant may purchase insurance on
behalf of any such director, officer, employee or agent.
II-1
<PAGE>
The Pooling and Servicing Agreement will provide that no director,
officer, employee or agent of the Company will be liable to the Trust Fund or
the Certificateholders for any action taken or for refraining from the taking
of any action pursuant to the Pooling and Servicing Agreement, except for such
person's own misfeasance, bad faith or gross negligence in the performance of
duties. The Pooling and Servicing Agreement will provide further that, with the
exceptions stated above, the Company and any director, officer, employee or
agent of the Company will be indemnified and held harmless by the Trust Fund
against any loss, liability or expense incurred in connection with any legal
action relating to the Pooling and Servicing Agreement or the Certificates,
other than any loss, liability or expense (i) related to any specific Mortgage
Loan or Mortgage Loans (except as any such loss, liability or expense shall be
otherwise reimbursable pursuant to the Pooling and Servicing Agreement), (ii)
incurred in connection with any violation by him or her of any state or federal
securities law or (iii) imposed by any taxing authority if such loss, liability
or expense is not specifically reimbursable pursuant to the terms of the
Pooling and Servicing Agreement.
II-2
<PAGE>
ITEM 16. EXHIBITS
Exhibit
Number
------
1.1 -- Form of Underwriting Agreement*
3.1 -- Certificate of Incorporation of the Company*
3.2 -- By-Laws of the Company*
4.1 -- Form of Pooling and Servicing Agreement*
5.1 -- Opinion of Latham & Watkins regarding the legality
of the Certificates
5.2 -- Opinion of Katten, Muchin & Zavis regarding the legality
of the Certificates
5.3 -- Opinion of Depositor's In-House Counsel regarding
Authorization of Agreements and Certificates
8.1 -- Opinion of Latham & Watkins regarding tax matters
8.2 -- Opinion of Katten, Muchin & Zavis regarding tax matters
23.1 -- Consent of Latham & Watkins (included as part of Exhibits
5.1 and 8.1 hereto)
23.2 -- Consent of Katten, Muchin & Zavis (included as part of
Exhibits 5.2 and 8.2 hereto)
24.1 -- Power of Attorney (included on page II-5)*
- ----------
* Previously filed.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933 (the
"Securities Act"); (ii) to reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement; (iii) to include any material information with respect
to the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement; provided, however, that no such post-effective amendment shall be
required if the information which would be required by clauses (i) and (ii) is
contained in periodic reports filed by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") that
are incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of the Registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Exchange Act that is
incorporated by reference in this registration statement shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
<PAGE>
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions described in Item 15 above, 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 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 of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Chicago, State of Illinois, on the 24th day of
June 1998.
HELLER FINANCIAL COMMERCIAL MORTGAGE ASSET CORP.
By: ____________*_______________
Name: David J. Friedman
Title: Chief Executive Officer
and President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------ ------------------------------- -------------
<S> <C> <C>
_________________*__________________ Director (Chairman of the Board June 24, 1998
Name: Lauralee E. Martin of Directors)
_________________*__________________ Director June 24, 1998
Name: Michael P. Goldsmith
________________ *__________________ Director June 24, 1998
Name: Dick Rai
_________________*_________________ Chief Executive Officer June 24, 1998
Name: David J. Friedman (Principal Executive Officer)
and President
_______________ _*__________________ Vice President and Chief June 24, 1998
Name: Thomas J. Bax Financial Officer (Principal
Financial Officer)
/s/ Margaret E. Govern Assistant Vice President and June 24, 1998
----------------------------------- Controller (Principal Accounting
Name: Margaret E. Govern Officer)
* /s/ Margaret E. Govern June 24, 1998
------------------------
Margaret E. Govern
as Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
Exhibit
Number
----------
1.1 -- Form of Underwriting Agreement*
3.1 -- Certificate of Incorporation of the Company*
3.2 -- By-Laws of the Company
4.1 -- Form of Pooling and Servicing Agreement*
5.1 -- Opinion of Latham & Watkins regarding the legality of the
Certificates
5.2 -- Opinion of Katten, Muchin & Zavis regarding the legality of the
Certificates
5.3 -- Opinion of Depositor's Counsel regarding the authorization of the
Agreements and the Certificates
8.1 -- Opinion of Latham & Watkins regarding tax matters
8.2 -- Opinion of Katten, Muchin & Zavis regarding tax matters
23.1 -- Consent of Latham & Watkins (included as part of Exhibits 5.1
and 8.1 hereto)
23.2 -- Consent of Katten, Muchin & Zavis (included as part of Exhibits
5.2 and 8.2 hereto)
24.1 -- Power of Attorney (included on page II-5)*
- ----------
* Previously filed.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
LATHAM & WATKINS
ATTORNEYS AT LAW
53rd AT THIRD, SUITE I000
PAUL R. WATKINS (I899-I973) 885 THIRD AVENUE NEW JERSEY OFFICE
DANA LATHAM (I898-I974) NEW YORK, NEW YORK I0022-4802 ONE NEWARK CENTER
TELEPHONE (2I2) 906-I200 NEWARK, NEW JERSEY 07I0I-3I74
FAX (2I2) 75I-4864 TELEPHONE (20I) 639-I234
CHICAGO OFFICE FAX (20I) 639-7298
SEARS TOWER, SUITE 5800
CHICAGO, ILLINOIS 60606 ORANGE COUNTY OFFICE
TELEPHONE (3I2) 876-7700 650 TOWN CENTER DRIVE, SUITE 2000
FAX (3I2) 993-9767 COSTA MESA, CALIFORNIA 92626-I925
TELEPHONE (7I4) 540-I235
LONDON OFFICE FAX (7I4) 755-8290
ONE ANGEL COURT
LONDON EC2R 7HJ ENGLAND SAN DIEGO OFFICE
TELEPHONE + 44-I7I-374 4444 70I "B" STREET, SUITE 2I00
FAX + 44-I7I-374 4460 SAN DIEGO, CALIFORNIA 92I0I-8I97
TELEPHONE (6I9) 236-I234
LOS ANGELES OFFICE FAX (6I9) 696-74I9
633 WEST FIFTH STREET,
SUITE 4000 SAN FRANCISCO OFFICE
LOS ANGELES, CALIFORNIA 505 MONTGOMERY STREET, SUITE I900
9007I-2007 SAN FRANCISCO, CALIFORNIA 94III-2562
TELEPHONE (2I3) 485-I234 TELEPHONE (4I5) 39I-0600
FAX (2I3) 89I-8763 FAX (4I5) 395-8095
MOSCOW OFFICE WASHINGTON, D.C. OFFICE
II3/I LENINSKY PROSPECT, I00I PENNSYLVANIA AVE., N.W., SUITE I300
SUITE C200 WASHINGTON, D.C. 20004-2505
MOSCOW, RUSSIA II7I98 TELEPHONE (202) 637-2200
TELEPHONE + 7-503 956-5555 FAX (202) 637-220I
FAX + 7-503 956-5556
</TABLE>
June 23, 1998
Heller Financial Commercial
Mortgage Asset Corp.
500 West Monroe Street
Chicago, Illinois 60661
Re: Heller Financial Commercial
Mortgage Asset Corp.
Registration Statement on Form S-3
Registration No. 333-44299
Ladies and Gentlemen:
We have acted as counsel for Heller Financial Commercial
Mortgage Asset Corp., a Delaware corporation (the "Company"), in connection
with the preparation of a registration statement on Form S-3 (the "Registration
Statement") which has been filed with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Act"),
for the registration under the Act of Mortgage Pass-Through Certificates (the
"Certificates"), issuable in series (each, a "Series"). As set forth in the
Registration Statement, each Series will be issued under and pursuant to the
conditions of a separate pooling and servicing agreement (each, an "Agreement")
among the Company, a trustee (the "Trustee") and, where appropriate, a master
servicer (the "Master Servicer") and a special servicer (the "Special
Servicer"), each to be identified (together with any other relevant parties) in
the prospectus supplement for such Series.
We are familiar with the proceedings taken and proposed to be
taken by the Company in connection with the authorization and issuance of the
Certificates, and for the purposes of this opinion, have assumed such
proceedings will be completed in the manner presently proposed by the
Registration Statement. In addition, we have made such legal and factual
examinations and inquiries, including an examination of originals or copies
certified or otherwise identified to our satisfaction of such documents,
corporate records and instruments, as we have deemed necessary or appropriate
for purposes of this opinion. We are relying on the opinion of Dennis Holland,
Esq., Associate General Counsel of Heller Financial, Inc., as to the due
authorization of the Agreement and the Certificates by the Company.
<PAGE>
LATHAM & WATKINS
Heller Financial Commercial
Mortgage Asset Corp.
June 23, 1998
Page 2
In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, and
the conformity to authentic original documents of all documents submitted to us
as copies.
We are opining only as to the effect of the Federal laws of
the United States, the internal laws of the State of New York and the General
Corporation Law of the State of Delaware, and we express no opinion with
respect to the applicability or the effect of the laws of any other
jurisdiction or, in the case of Delaware, any other laws, or as to any matters
of municipal law or the laws of any other local agencies within any state.
Subject to the foregoing and the other matters set forth
herein, we are of the opinion that:
1. When an Agreement relating to a Series has been duly and
validly executed and delivered by the Company, the Master Servicer and the
Special Servicer, if any, the Trustee and any other party thereto, such
Agreement will constitute a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms.
2. When a Series of Certificates has been executed,
authenticated and delivered by the Trustee against payment in accordance with
the terms of the related underwriting agreement, such Series will be validly
issued, fully paid and nonassessable, and the holders thereof will be entitled
to the benefits of the related Agreement.
The opinions rendered above are subject to the following
exceptions, limitations and qualifications: (i) the effect of bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or other similar
laws relating to or affecting the rights and remedies of creditors, (ii) the
effect of general principles of equity, whether enforcement is considered in a
proceeding in equity or law, and the discretion of the court before which any
proceeding therefor may be brought, and (iii) the unenforceability under certain
circumstances under law or court decisions of provisions providing for the
indemnification of or contribution to a party with respect to a liability where
such indemnification or contribution is contrary to public policy.
We hereby consent to the filing of this letter as Exhibit 5.1
to the Registration Statement and to the references to this firm under the
caption "Legal Matters" in the prospectus forming a part of the Registration
Statement, without admitting that we are "experts" within the meaning of the
Act or the Rules and Regulations of the Commission issued thereunder with
respect to any part of the Registration Statement, including this exhibit.
Very truly yours,
/s/ Latham & Watkins
-----------------------
<PAGE>
[KATTEN MUCHIN & ZAVIS LETTERHEAD]
June 23, 1998
Heller Financial Commercial
Mortgage Asset Corp.
500 West Monroe Street
Chicago, Illinois 60661
Re: Heller Financial Commercial
Mortgage Asset Corp.
Registration Statement on Form S-3
Registration No. 333-44299
----------------------------------
Ladies and Gentlemen:
We have acted as counsel for Heller Financial Commercial mortgage
Asset Corp., a Delaware corporation (the "Company"), in connection with the
preparation of a registration statement on Form S-3 (the "Registration
Statement") which has been filed with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Act"),
for the registration under the Act of Mortgage Pass-Through Certificates (the
"Certificates"), issuable in series (each, a "Series). As set forth in the
Registration Statement, each Series will be issued under and pursuant to the
conditions of a separate pooling and servicing agreement (each, an "Agreement")
among the Company, a trustee (the "Trustee") and, where appropriate, a master
servicer (the "Master Servicer") and a special servicer (the "Special
Servicer"), each to be identified (together with any other relevant parties) in
the prospectus supplement for such Series.
We are familiar with the proceedings taken and proposed to be taken by
the Company in connection with the authorization and issuance of the
Certificates, and for the purposes of this opinion, have assumed such
proceedings will be completed in the manner presently proposed by the
Registration Statement. In addition, we have made such legal and factual
examinations and inquiries, including an examination of originals or copies
certified or otherwise identified to our satisfaction of such documents,
corporate records and instruments, as we have deemed necessary or appropriate
for purposes of this opinion. We are relying on the opinion of Dennis Holland,
Esq., Associate General Counsel of Heller Financial, Inc., as to the due
authorization of the Agreement and the Certificates by the Company.
In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity to authentic original documents of all documents submitted to us as
copies.
<PAGE>
Heller Financial Commercial
Mortgage Asset Corp.
500 West Monroe Street
Chicago, Illinois 60661
June 23, 1998
Page 2
We are opining only as to the effect of the Federal laws of the United
States, the internal laws of the States of Illinois and New York and the
General Corporation Law of the State of Delaware, and we express no opinion
with respect to the applicability or the effect of the laws of any other
jurisdiction or, in the case of Delaware, any other laws, or as to any matters
of municipal law or the laws of any other local agencies within any state.
Subject to the foregoing and the other matters set forth herein, we
are of the opinion that:
1. When an Agreement relating to a Series has been duly and validly
executed and delivered by the Company, the Master Servicer and the Special
Servicer, if any, the Trustee and any other party thereto, such Agreement
will constitute a valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms.
2. When a Series of Certificates has been executed, authenticated and
delivered by the Trustee against payment in accordance with the terms of the
related underwriting agreement, such Series will be validly issued, fully paid
and nonassessable, and the holders thereof will be entitled to the benefits of
the related Agreement.
The opinions rendered above are subject to the following exceptions,
limitations and qualifications: (i) the effect of bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar laws
relating to or affecting the rights and remedies of creditors, (ii) the effect
of general principles of equity, whether enforcement is considered in a
proceeding in equity or law, and the discretion of the court before which any
proceeding therefor may be brought, (iii) the unenforceability under certain
circumstances under law or court decisions of provisions providing for the
indemnification or of contribution to a party with respect to a liability where
such indemnification or contribution is contrary to public policy, and (iv)
possible limitations arising from applicable laws other than those referred to
in the preceding clause (i) upon the remedial provisions contained in any
Agreement, but such limitations do not in our opinion of themselves make the
remedies afforded inadequate for the practical realization of the benefits
purported to be provided thereby.
<PAGE>
Heller Financial Commercial
Mortgage Asset Corp.
500 West Monroe Street
Chicago, Illinois 60661
June 23, 1998
Page 3
We hereby consent to the filing of this letter as an Exhibit 5-2 to
the Registration Statement and to the references to this firm under the caption
"Legal Matters" in the prospectus forming a part of the Registration Statement,
without admitting that we are "experts" within the meaning of the Act or the
Rules and Regulations of the Commission issued thereunder with respect to any
part of the Registration Statement, including this exhibit.
Very truly yours,
/s/ Katten Muchin & Zavis
KATTEN MUCHIN & ZAVIS
<PAGE>
Dennis K. Holland
Deputy General Counsel
writer's direct dial (312) 441-6756
June 23, 1998
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661-3693
Latham & Watkins
53rd at Third
Suite 1000
885 Third Avenue
New York, New York 10022
Re: Heller Financial Commercial Mortgage Asset Corp.
Registration Statement on Form S-3
Registration No. 333-44299
Ladies and Gentlemen:
I am Deputy General Counsel of Heller Financial, Inc.
In that capacity, I have acted as counsel to Heller Financial Commercial
Mortgage Asset Corp., a Delaware corporation ("Heller") in connection with that
certain registration statement on Form S-3 (the "Registration Statement") which
has been filed with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), for the registration
under the Act of mortgage pass-through certificates (the "Certificates"),
issuable in series (each a "Series"). As set forth in the Registration
Statement, each Series will be issued under and pursuant to the conditions of a
separate pooling and servicing agreement (each an "Agreement") among Heller, a
trustee (the "Trustee") and, where appropriate, a master servicer (the "Master
Servicer") and a special servicer (the "Special Servicer"), each to be
identified (together with any relevant parties) in the prospectus supplement
for such Series. Except as otherwise indicated, capitalized terms used herein
are defined as set forth in the Registration Statement.
In connection with this opinion, I am familiar with the
proceedings taken and proposed to be taken by Heller in connection with the
authorization and issuance of the Certificates and for the purposes of this
opinion, have assumed such proceedings will be completed in the manner
presently proposed by the Registration Statement. I have also
<PAGE>
Katten Muchin & Zavis
Latham & Watkins
June 23, 1998
Page 2
examined such corporate records of Heller and other documents and have made
such examination of law as I have deemed necessary in connection with this
opinion.
In rendering this opinion, I have assumed the accuracy
and completeness of all documents and records that I have reviewed, the
genuineness of all signatures (other than those on behalf of Heller), the
authenticity of the documents submitted to me as originals and the conformity
to authentic original documents of all documents submitted to me as copies.
In rendering this opinion, as to questions of fact
material to this opinion I have relied to the extent I have deemed such
reliance
appropriate, without investigation, on certificates and other communications
from public officials and from officers of Heller.
Wherever I indicate that my opinion with respect to the
existence or absence of facts is based on my knowledge, my opinion is based
solely on my current actual knowledge, and I have conducted no special
investigation of factual matters in connection with this opinion.
The opinions set forth below are subject to the
following qualifications:
(i) the effects of bankruptcy, insolvency,
reorganization, receivership, moratorium and other similar laws affecting the
rights and remedies of creditors generally;
(ii) the effects of general principles of equity,
whether applied by a court of law or equity, with respect to the
performance and enforcement of the Agreement; and(iii) I express no opinion as
to the effect of any federal or state securities laws or antitrust laws or as
to the creation, perfection, priority or enforcement of any security interest
granted under the Agreement.
Based upon and subject to the foregoing and to the last
two paragraphs of this letter, it is my opinion that:
1. Heller has all requisite corporate power and
authority to execute, deliver and perform its obligations under an Agreement
relating to a Series, once the Agreement is executed by an officer of Heller
with at least the rank of Assistant Vice President, Heller Financial Inc.'s
("HFI's") Credit Policy Committee has approved the sale and HFI's Chief
Financial Officer has approved the terms of the identified underlying loans
sold in the Series.
2. When the terms of the underwriting agreement entered
into by Heller and the company underwriting the Certificates have been
satisfied, HFI's chief financial officer and Heller's Manager of CMBS have
approved the underwriter, and the Agreement is authorized as above for a
Series, the Certificates will have been duly authorized.
<PAGE>
Katten Muchin & Zavis
Latham & Watkins
June 23, 1998
Page 3
This opinion is limited to the laws of the State of
Illinois, the laws of the United States of America and the General Corporation
Law of the State of Delaware, and I do not express any opinion herein
concerning any other law. In addition, I express no opinion herein concerning
any statutes, ordinances, administrative decisions, rules or regulations of any
county, town, municipality or special political subdivision, (whether created
or enabled through legislative action at the federal, state or regional level).
This opinion is given as of the date hereof, and I assume no obligation to
advise you of changes that may hereafter be brought to my attention.
This opinion is solely for the information of the
addressee hereof and is not to be quoted in whole or in part or otherwise
referred to, nor is it to be filed with any governmental agency or any other
person, without my prior written consent. No one other than the addressees
hereof is entitled to rely on this. This opinion is rendered solely for
purposes of the Transaction and should not be relied upon for any other
purpose.
Very truly yours,
HELLER FINANCIAL, INC.
By: /s/ Dennis Holland
________________________
Dennis Holland
Deputy General Counsel
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
LATHAM & WATKINS
ATTORNEYS AT LAW
53rd AT THIRD, SUITE I000
PAUL R. WATKINS (I899-I973) 885 THIRD AVENUE NEW JERSEY OFFICE
DANA LATHAM (I898-I974) NEW YORK, NEW YORK I0022-4802 ONE NEWARK CENTER
TELEPHONE (2I2) 906-I200 NEWARK, NEW JERSEY 07I0I-3I74
FAX (2I2) 75I-4864 TELEPHONE (20I) 639-I234
CHICAGO OFFICE FAX (20I) 639-7298
SEARS TOWER, SUITE 5800
CHICAGO, ILLINOIS 60606 ORANGE COUNTY OFFICE
TELEPHONE (3I2) 876-7700 650 TOWN CENTER DRIVE, SUITE 2000
FAX (3I2) 993-9767 June 23, 1998 COSTA MESA, CALIFORNIA 92626-I925
TELEPHONE (7I4) 540-I235
LONDON OFFICE FAX (7I4) 755-8290
ONE ANGEL COURT
LONDON EC2R 7HJ ENGLAND SAN DIEGO OFFICE
TELEPHONE + 44-I7I-374 4444 70I "B" STREET, SUITE 2I00
FAX + 44-I7I-374 4460 SAN DIEGO, CALIFORNIA 92I0I-8I97
TELEPHONE (6I9) 236-I234
LOS ANGELES OFFICE FAX (6I9) 696-74I9
633 WEST FIFTH STREET, SUITE
4000 SAN FRANCISCO OFFICE
LOS ANGELES, CALIFORNIA 505 MONTGOMERY STREET, SUITE I900
9007I-2007 SAN FRANCISCO, CALIFORNIA 94III-2562
TELEPHONE (2I3) 485-I234 TELEPHONE (4I5) 39I-0600
FAX (2I3) 89I-8763 FAX (4I5) 395-8095
MOSCOW OFFICE WASHINGTON, D.C. OFFICE
II3/I LENINSKY PROSPECT, I00I PENNSYLVANIA AVE., N.W., SUITE I300
SUITE C200 WASHINGTON, D.C. 20004-2505
MOSCOW, RUSSIA II7I98 TELEPHONE (202) 637-2200
TELEPHONE + 7-503 956-5555 FAX (202) 637-220I
FAX + 7-503 956-5556
</TABLE>
Heller Financial Commercial Mortgage Asset Corp.
500 West Monroe Street
Chicago, Illinois 60661
Re: Heller Financial Commercial Mortgage Asset Corp.
Registration Statement on Form S-3
(File No. 333-44299)
Ladies and Gentlemen:
We have acted as tax counsel to Heller Financial Commercial
Mortgage Asset Corp., a Delaware corporation (the "Registrant"), in connection
with the preparation of a registration statement on Form S-3 (Registration No.
333-44299) (the "Registration Statement"), which has been filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Act"), as amended on the date hereof, for the registration under the Act
of Mortgage Pass-Through Certificates (the "Certificates") issuable in series
(the "Series") and evidencing interests in certain pools of loans. As described
in the Registration Statement, each Series of Certificates will be issued under
and pursuant to the terms of a separate (i) Pooling and Servicing Agreement
among the Registrant, a trustee and a master servicer, each to be specified in
the prospectus supplement for such series of Certificates or (ii) trust
agreement (the "Trust Agreement") among the Registrant and a trustee named in
the related prospectus supplement.
In rendering our opinion, we have examined and are familiar
with originals or copies, certified or otherwise identified to our
satisfaction, of the Registration Statement, the prospectus (the "Prospectus")
and the form of prospectus supplement (the "Prospectus Supplement") included
therein, and such other documents as we have deemed necessary or appropriate as
a basis for the opinion set forth below. In rendering our opinion, we have
examined the Internal Revenue Code of 1986, as amended as of the date hereof,
the Treasury Regulations promulgated thereunder, judicial decisions,
legislative history and such other
<PAGE>
LATHAM & WATKINS
Heller Financial Commercial
Mortgage Asset Corp.
June 23, 1998
Page 2
authorities as we have deemed appropriate to our analysis. The statutory
provisions, regulations, interpretations and other authorities upon which our
opinion is based are subject to change, and such changes could apply
retroactively.
We express no opinion as to any laws other than the federal
laws of the United States of America as of the date hereof.
Based upon and subject to the foregoing, we confirm that it
is our opinion that the information in the Prospectus under the captions
"Summary of Prospectus -- Tax Status of the Certificates" and "Federal Income
Tax Consequences," to the extent it constitutes matters of law or legal
conclusions, is correct in all material respects, based on existing law and the
assumptions stated therein.
The foregoing opinion and the discussions contained in the
Prospectus under the captions "Summary of Prospectus -- Tax Status of the
Certificates" and "Federal Income Tax Consequences" represent our conclusions
as to the application of existing law. No assurance can be given that the
Internal Revenue Service will not assert contrary positions or that the law
will not change. Any change in applicable law, which may change at any time and
which is subject to differing interpretation, or in the facts or documents on
which our opinion is based may affect the validity of the foregoing opinion. We
note that the Prospectus and Prospectus Supplement filed with the Registration
Statement do not relate to any specific transaction. Accordingly, the above
referenced descriptions of federal income tax consequences may require
modifications in the context of an actual transaction. We further note that the
summaries under the above referenced captions do not purport to discuss all
possible federal income tax ramifications of any proposed issuance. We express
no opinion as to any matter not specifically covered by the foregoing opinion.
We hereby consent to the filing of this letter as Exhibit 8.1
to the Registration Statement and to the references to Latham & Watkins under
the captions "Summary of Prospectus -- Tax Status of the Certificates" and
"Federal Income Tax Consequences" in the Prospectus, without implying or
admitting that we are "experts" within the meaning of the Act or the rules and
regulations of the Commission issued thereunder, with respect to any part of
the Registration Statement, including this exhibit.
Very truly yours,
LATHAM & WATKINS
<PAGE>
[KATTEN MUCHIN & ZAVIS LETTERHEAD]
June 23, 1998
Heller Financial Commercial Mortgage Asset Corp.
500 West Monroe Street
Chicago, Illinois 60661
Re: Heller Financial Commercial Mortgage Asset Corp.
Registration Statement on Form S-3
(File No. 333-44299)
----------------------------------
Ladies and Gentlemen::
We have acted as tax counsel to Heller Financial Commercial Mortgage
Asset Corp., a Delaware corporation (the "Registrant"), in connection with the
preparation of a registration statement on Form S-3 (Registration No.
333-44299) (the "Registration Statement"), which has been filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Act"), as amended on the date hereof, for the registration under the Act
of Asset Backed Certificates (the "Certificates") issuable in series (the
"Series") and evidencing interests in certain pools of loans. As described in
the Registration Statement, each Series of Certificates will be issued under
and pursuant to the terms of a separate (i) Pooling and Servicing Agreement
among the Registrant, a trustee and a master servicer, each to be specified in
the prospectus supplement for such series of Certificates or (ii) trust
agreement (the "Trust Agreement") among the Registrant and a trustee named in
the related prospectus supplement.
In rendering our opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
the Registration Statement, the prospectus (the "Prospectus") and the forms of
prospectus supplement (the "Prospectus Supplements") included therein, and such
other documents as we have deemed necessary or appropriate as a basis for the
opinion set forth below. In rendering our opinion, we have examined the
Internal Revenue Code of 1986, as amended as of the date hereof, the Treasury
Regulations promulgated thereunder, judicial decisions, legislative history and
such other authorities as we have deemed appropriate to our analysis. The
statutory provisions, regulations, interpretations and other authorities upon
which our opinion is based are subject to change, and such changes could apply
retroactively.
<PAGE>
Heller Financial Commercial
Mortgage Asset Corp.
June 23, 1998
Page 2
We express no opinion as to any laws other than the federal laws of
the United States of America as of the date hereof.
Based upon and subject to the foregoing, we confirm that it is our
opinion that the information in the Prospectus under the captions "Summary of
Prospectus -- Tax Status of the Certificates" and "Federal Income Tax
Consequences," to the extent it constitutes matters of law or legal conclusions,
is correct in all material respects, based on existing law and the assumptions
stated therein.
The foregoing opinion and the discussions contained in the Prospectus
under the caption "Federal Income Tax Consequences" represent our conclusions
as to the application of existing law. No assurance can be given that the
Internal Revenue Service will not assert contrary positions or that the law
will not change. Any change in applicable law, which may change at any time and
which is subject to differing interpretation, or in the facts or documents on
which our opinion is based may affect the validity of the foregoing opinion. We
note that the Prospectus and Prospectus Supplements filed with the Registration
Statement do not relate to any specific transaction. Accordingly, the above
referenced descriptions of federal income tax consequences may require
modifications in the context of an actual transaction. We further note that the
summaries under the above referenced captions do not purport to discuss all
possible federal income tax ramifications of any proposed issuance. We express
no opinion as to any matter not specifically covered by the foregoing opinion.
We hereby consent to the filing of this letter as an Exhibit 8.2 to
the Registration Statement and to the references to Katten Muchin & Zavis under
the captions "Federal Income Tax Consequences" and "Legal Matters" in the
Prospectus, without implying or admitting that we are "experts" within the
meaning of the Act or the rules and regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, including
this exhibit.
Very truly yours,
/s/ Katten Muchin & Zavis
KATTEN MUCHIN & ZAVIS
