<PAGE>
As filed with the Securities and Exchange Commission on June 1, 2000
Registration No. 333-31070
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
STRUCTURED ASSET SECURITIES CORPORATION
(Exact name of registrant as specified in its charter)
on behalf of itself and trusts with respect to which
it is the settlor or depositor
Delaware
(State or other jurisdiction of incorporation or organization)
74-2440850
(I.R.S. employer identification number)
200 Vesey Street
New York, New York 10285
(212) 526-7000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Mark L. Zusy
Structured Asset Securities Corporation
200 Vesey Street
New York, New York 10285
(212) 526-7000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
<TABLE>
<S> <C> <C>
William J. Cullen, Esq. Scott Kimmel, Esq. Michael S. Gambro, Esq.
Sidley & Austin Lehman Brothers Inc. Patrick T. Quinn, Esq.
875 Third Avenue 3 World Financial Center Cadwalader, Wickersham & Taft
New York, New York 10022 New York, New York 10285 100 Maiden Lane
(212) 906-2276 (212) 526-4058 New York, New York 10038
(212) 504-6000
Richard F. Kadlick, Esq. James Cotins, Esq.
Skadden, Arps, Slate, Meagher & Flom Thacher, Proffitt & Wood
919 Third Avenue Two World Trade Center
New York, New York 10022 New York, New York 10048
(212) 735-2716 (212) 912-7400
</TABLE>
<PAGE>
Approximate date of commencement of proposed sale to the public: From
time to time on or after the effective date of this Registration Statement.
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 plans, please check the following box. [x]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
OFFERING AMOUNT MAXIMUM PRICE AMOUNT OF REGISTRATION
TITLE OF SECURITIES BEING REGISTERED TO BE REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE(3)
------------------------------------ ------------------ -------------- ----------------- ------------
<S> <C> <C> <C> <C>
Commercial Mortgage-Backed $4,000,000,000 100% $4,000,000,000 $1,056,000
Securities ============== ======== ============== ==========
</TABLE>
-------------------------
(1) In addition, pursuant to Rule 429 under the Securities Act of 1933,
when this Registration Statement is declared effective, any securities
that remain unsold under the Registration Statement on Form S-3 (File
No. 333-49129) of the Registrant will be carried forward. As of the
date that Amendment No. 2 to this Registration Statement was filed,
$464,106,493 of securities remained unsold under the Registration
Statement on Form S-3 (File No. 333-49129) of the Registrant, for which
a filing fee of $136,911.42 has been previously paid.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The filing fee of $1,056,000 was previously paid in connection with the
Registration Statement filed on February 24, 2000 relating to the
registration of mortgage-backed securities in the aggregate amount of
$4,000,000,000.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 under the Securities Act of 1933, when this
Registration Statement is declared effective, each Prospectus which is part of
this Registration Statement shall relate to any securities which remain unsold
under the Registration Statement on Form S-3 (333-49129) of the Registrant.
2
<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ____________)
LB COMMERCIAL MORTGAGE TRUST, ________, ISSUER
COLLATERALIZED MORTGAGE OBLIGATIONS, SERIES ______
CLASS A-1, CLASS A-2, CLASS B, CLASS C, CLASS D, CLASS E, CLASS F AND CLASS X
APPROXIMATE TOTAL PRINCIPAL BALANCE AT INITIAL ISSUANCE: $_______________
We, Structured Asset Securities Corporation, have prepared this prospectus
supplement in order to offer the classes of collateralized mortgage obligations
identified above. These obligations, which are to be offered in the form of
bonds, are the only securities offered by this prospectus supplement. This
prospectus supplement specifically relates to, and is accompanied by, our
prospectus dated ____________. We will not list the offered bonds on any
national securities exchange or any automated quotation system of any registered
securities associations, such as NASDAQ.
The offered bonds will be secured, nonrecourse obligations of the issuer
identified above. They will not represent interests in or obligations of any
other party. The collateral for the offered bonds will include a pool of
multifamily and commercial mortgage loans. The initial mortgage pool balance
that we expect to transfer to the trust will be approximately $____________. No
governmental agency or instrumentality or private insurer has insured or
guaranteed the offered bonds or any of the mortgage loans that back them.
Each class of offered bonds will receive monthly distributions of
interest, principal or both, commencing in ___________. The table on page
S-__ of this prospectus supplement contains a list of the classes of offered
bonds and states the principal balance, interest rate, and other select
characteristics of each class. Credit enhancement is being provided through
the subordination of ___ non-offered classes of the series ____ bonds. That
same table on page S-__ of this prospectus supplement also contains a list of
the non-offered classes of the series ____ bonds.
-------------------------
YOU SHOULD FULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE S-____ IN THIS
PROSPECTUS SUPPLEMENT AND ON PAGE ____ IN THE ACCOMPANYING PROSPECTUS PRIOR TO
INVESTING IN THE OFFERED BONDS.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
Lehman Brothers Inc., is the underwriter for this offering. It will
purchase the offered bonds from us. Our proceeds from the sale of the offered
bonds will equal approximately ____% of the total initial principal balance
of the offered bonds, plus accrued interest, before deducting expenses
payable by us. The underwriter's commission will be the difference between
the price it pays to us for the offered bonds and the amount it receives from
the sale of the offered bonds to the publc. The underwriter currently
intends to sell the offered bonds at varying prices to be determined at the
time of sale. See "Method of Distribution" in this prospectus supplement.
<PAGE>
LEHMAN BROTHERS
The date of this prospectus supplement is _________________.
S-2
<PAGE>
IMPORTANT NOTICE ABOUT THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT,
THE ACCOMPANYING PROSPECTUS AND THE RELATED REGISTRATION STATEMENT
S-3
<PAGE>
Information about the offered bonds is contained in two separate
documents:
- this prospectus supplement, which describes the specific terms of
the offered bonds; and
- the accompanying prospectus, which provides general information,
some of which may not apply to the offered bonds.
You should read both this prospectus supplement and the accompanying
prospectus in full to obtain material information concerning the offered
bonds.
In addition, we have filed with the Securities and Exchange Commission
a registration statement under the Securities Act of 1933, as amended, with
respect to the offered bonds. This prospectus supplement and the accompanying
prospectus form a part of that registration statement. However, this prospectus
supplement and the accompanying prospectus do not contain all of the information
contained in our registration statement. For further information regarding the
documents referred to in this prospectus supplement and the accompanying
prospectus, you should refer to our registration statement and the exhibits to
it. Our registration statement and the exhibits to it can be inspected and
copied at prescribed rates at the public reference facilities maintained by the
SEC at its public reference section, 450 Fifth Street, N.W., Washington, D.C.
20549, and at its regional offices located at: Chicago regional office, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661; and New York regional
office, Seven World Trade Center, New York, New York 10048. Copies of these
materials can also be obtained electronically through the SEC's internet web
site (http:\\www.sec.gov).
You should only rely on the information contained in this prospectus
supplement, the accompanying prospectus and our registration statement. We have
not authorized any person to give any other information or to make any
representation that is different from the information contained in this
prospectus supplement, the accompanying prospectus or our registration
statement.
S-4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Important Notice About The Information Contained in this Prospectus Supplement, the Accompanying Prospectus
and the Related Registration Statement...................................................................................2
Summary of Prospectus Supplement.........................................................................................4
Risk Factors............................................................................................................25
Capitalized Terms Used in this Prospectus Supplement....................................................................35
Forward-Looking Statements..............................................................................................35
Description of the Mortgage Collateral..................................................................................35
Servicing of the Pledged Mortgage Loans.................................................................................54
Description of the Offered Bonds........................................................................................77
Yield And Maturity Considerations.......................................................................................98
Use of Proceeds........................................................................................................105
Federal Income Tax Consequences........................................................................................105
ERISA Considerations...................................................................................................108
Legal Investment.......................................................................................................114
Method of Distribution.................................................................................................114
Legal Matters..........................................................................................................115
Ratings................................................................................................................116
Glossary...............................................................................................................118
ANNEX A-1 -- Certain Characteristics of the Pledged Mortgage Loans...................................................A-1-1
ANNEX A-2 -- Certain Monetary Terms of the Pledged Mortgage Loans....................................................A-2-1
ANNEX B -- Term Sheet..................................................................................................B-1
ANNEX C-1 -- Price/Yield Tables......................................................................................C-1-1
ANNEX C-2 -- Decrement Tables........................................................................................C-2-1
ANNEX D -- Form of Delinquent Loan Status Report.......................................................................D-1
ANNEX E -- Form of Historical Loan Modification Report.................................................................E-1
ANNEX F -- Form of Historical Liquidation Report.......................................................................F-1
ANNEX G -- Form of REO Status Report...................................................................................G-1
ANNEX H -- Form of Servicer Watch List Report..........................................................................H-1
ANNEX I -- Form of Operating Statement Analysis Report.................................................................I-1
ANNEX J -- Form of NOI Adjustment Worksheet............................................................................J-1
ANNEX K -- Form of Comparative Financial Status Report.................................................................K-1
PROSPECTUS
Important Notice About the Information Presented in this Prospectus......................................................3
Available Information; Incorporation by Reference........................................................................3
Summary of Prospectus....................................................................................................4
Risk Factors............................................................................................................15
Description of the Trust Estates........................................................................................36
Yield and Maturity Considerations.......................................................................................61
Structured Asset Securities Corporation.................................................................................67
Issuers.................................................................................................................68
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
Description of the Bonds................................................................................................68
Description of the Governing Documents..................................................................................78
Legal Aspects of the Mortgage Loans.....................................................................................92
Federal Income Tax Consequences........................................................................................105
State and Other Tax Consequences.......................................................................................136
ERISA Considerations...................................................................................................136
Legal Investment.......................................................................................................141
Use of Proceeds........................................................................................................143
Method of Distribution.................................................................................................143
Legal Matters..........................................................................................................145
Financial Information..................................................................................................145
Rating.................................................................................................................145
</TABLE>
S-6
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
This summary contains selected information regarding the offering being
made by this prospectus supplement. It does not contain all of the information
you need to consider in making your investment decision. TO UNDERSTAND ALL OF
THE TERMS OF THE OFFERING OF THE OFFERED BONDS, YOU SHOULD READ CAREFULLY THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN FULL.
INTRODUCTION TO THE TRANSACTION
The offered bonds will be part of a series of collateralized mortgage
obligations designated as the Series ______Collateralized Mortgage Obligations
and consisting of multiple classes. The table below identifies the respective
classes of that series, specifies various characteristics of each of those
classes and indicates which of those classes are offered by this prospectus
supplement and which are not.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
SERIES _____ COLLATERALIZED MORTGAGE OBLIGATIONS
------------------------------------------------------------------------------------------------------------------------------
APPROX.
TOTAL APPROX. % APPROX.
PRINCIPAL OF INITIAL TOTAL CREDIT WEIGHTED
BALANCE AT MORTGAGE SUPPORT AT INTEREST INITIAL AVERAGE
INITIAL COLLATERAL INITIAL RATE INTEREST LIFE PRINCIPAL ____/___
CLASS ISSUANCE BALANCE ISSUANCE DESCRIPTION RATE (YEARS) WINDOW RATINGS
------------------------------------------------------------------------------------------------------------------------------
Offered Bonds
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A-1 $ % % %
------------------------------------------------------------------------------------------------------------------------------
A-2 $ % % %
------------------------------------------------------------------------------------------------------------------------------
B $ % % %
------------------------------------------------------------------------------------------------------------------------------
C $ % % %
------------------------------------------------------------------------------------------------------------------------------
D $ % % %
------------------------------------------------------------------------------------------------------------------------------
E $ % % %
------------------------------------------------------------------------------------------------------------------------------
F $ % % %
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
X N/A N/A N/A %
------------------------------------------------------------------------------------------------------------------------------
Non-Offered
Bonds
------------------------------------------------------------------------------------------------------------------------------
G $ % N/A % N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
H $ % N/A % N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
J $ % N/A % N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
K $ % N/A % N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
L $ % N/A % N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
M $ % N/A % N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
N $ % N/A % N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
R-I N/A N/A N/A N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
R-II N/A N/A N/A N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
R-III N/A N/A N/A N/A N/A N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The bonds will be secured, non recourse obligations of the
issuer. In order to secure its payment obligations with respect to the offered
bonds, the issuer will pledge a pool of secured mortgage loans having the
characteristics described in this prospectus supplement. In addition, the
mortgage collateral supporting the bonds may include any underlying real
properties acquired on behalf of the bondholders and the issuer through
foreclosure, deed in lieu of foreclosure or similar proceedings.
We will establish the issuer and convey to it the mortgage
collateral and other assets which are intended to support payments on the
offered bonds, under a deposit trust agreement. The parties to the deposit trust
agreement will be us and an owner trustee. The issuer will issue, and pledge the
mortgage collateral for, the offered bonds under an indenture. The parties to
the indenture will be the issuer and a bond trustee acting on behalf of the
bondholders. A servicing and administration agreement will govern the servicing
and administration of the pledged mortgage loans. The parties to the servicing
administration agreement will be us, the bond trustee and a master servicer and
special servicer. Copies of the deposit trust agreement, the indenture and the
servicing and administration agreement will be filed with the SEC as an exhibit
to a current report on Form 8-K, within 15 days after the initial issuance of
the offered bonds. The SEC will make that current report on Form 8-K and its
exhibits available to the public for inspection.
KEY BOND FEATURES SHOWN IN THE TABLE ABOVE
A. TOTAL PRINCIPAL BALANCE
S-8
<PAGE>
<TABLE>
<S> <C>
OR NOTIONAL AMOUNT AT
INITIAL ISSUANCE..................... The table above identifies for each class of
the series _____ bonds the approximate total
principal balance, if any, of that class at
initial issuance. The actual total principal
balance of any class of series _____ bonds
at initial issuance may be larger or smaller
than the amount shown above, depending on
the actual size of the initial mortgage
collateral balance. The actual size of the
initial mortgage collateral balance may be
as much as 5% larger or smaller than the
amount presented in this prospectus
supplement.
As shown in the table above, the class A-1,
A-2, B, C, D, E, F, G, H, J, K, L, M and N
bonds are the only series _____ bonds with
principal balances. The principal balance of
any of those bonds at any time represents
the maximum amount that the holder may
receive as principal out of cashflow
received on or with respect to the pledged
mortgage loans and other assets included in
the trust estate.
The class X bonds do not have principal
balances. They are interest-only bonds. For
purposes of calculating the amount of
accrued interest with respect to the class X
bonds, however, they will have a total
notional amount equal to the total principal
balance of the class A-1, A-2, B, C, D, E,
F, G, H, J, K, L, M and N bonds outstanding
from time to time. The total initial
notional amount of the class X bonds will be
approximately $________________, although it
may be as much as 5% larger or smaller.
The class R-I, R-II and R-III bonds do not
have principal balances or notional amounts.
They are residual interest bonds. The
holders of the class R-I, R-II and R-III
bonds are not expected to receive any
material payments.
B. TOTAL CREDIT SUPPORT AT
INITIAL ISSUANCE..................... The respective classes of the series _____
bonds entitle their holders to varying
degrees of seniority for purposes of--
- receiving payments of interest and, if and
when applicable, payments of principal, and
- bearing the effects of losses on the
pledged mortgage loans and other assets
included in the trust estate, as well as
default-related
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
and other unanticipated expenses of the trust.
The class A-1, A-2 and X bonds are the most
senior. The class R-I, R-II and R-III bonds
are the most subordinate, but they do not
provide any credit support to the other
series _____ bonds. The remaining classes of
series _____ bonds are listed from top to
bottom in descending order of seniority.
The table above shows the approximate total
credit support provided to each class of the
offered bonds, other than the class X bonds,
through the subordination of other classes
of the series _____ bonds. In the case of
each of those classes of offered bonds, the
credit support shown in the table above
represents the total initial principal
balance, expressed as a percentage of the
initial mortgage collateral balance, of all
classes of the series _____ bonds that are
subordinate to the indicated class.
C. INTEREST RATE........................ Each class of the series _____ bonds, other
than the class R-I, R-II and R-III bonds,
will bear interest. The table above provides
the indicated information regarding the
annual rate at which each of those classes
of the series _____ bonds will accrue
interest. [ADD SUMMARY DESCRIPTIONS OF THE
VARIABLE INTEREST RATES .]
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
D. WEIGHTED AVERAGE LIFE
AND PRINCIPAL WINDOW................. The weighted average life of any class of
offered bonds, other than the class X bonds,
refers to the average amount of time that
will elapse from the date of their issuance
until each dollar to be applied in reduction
of the total principal balance of those
bonds is paid to the investor. The principal
window for any class of offered bonds, other
than the class X bonds, is the period during
which the holders of that class of offered
bonds will receive payments of principal.
The weighted average life and principal
window shown in the table above for each
class of offered bonds, other than the class
X bonds, were calculated based on the
following assumptions with respect to each
pledged mortgage loan--
- the related borrower timely makes all
payments on the mortgage loan,
- if the mortgage loan has an anticipated
repayment date, as described under "--The
Pledged Mortgage Loans and the Underlying
Real Properties" below, the mortgage loan
will be paid in full on that date, and
- that mortgage loan will not otherwise be
prepaid prior to stated maturity.
The weighted average life and principal
window shown in the table above for each
class of offered bonds, other than the class
X bonds, were further calculated based on
the other maturity assumptions described
under "Yield and Maturity Considerations" in
this prospectus supplement.
E. RATINGS.............................. The ratings shown in the table above for the
offered bonds are those of ______________
and _____________, respectively. It is a
condition to their issuance that the
respective classes of the offered bonds
receive credit ratings no lower than those
shown in the table above.
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
The ratings of the offered bonds address the
timely payment of interest and, except in
the case of the class X bonds, the ultimate
payment of principal on or before
______________, which is the rated final
payment date. A security rating is not a
recommendation to buy, sell or hold
securities and the assigning rating agency
may revise or withdraw its rating at any
time.
For a description of the limitations of the
ratings of the offered bonds, see "Ratings"
in this prospectus supplement.
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
RELEVANT PARTIES
"WE" AND "US"............................ Our name is Structured Asset Securities
Corporation. We are a special purpose
Delaware corporation. Our address is 200
Vesey Street, New York, New York 10285 and
our telephone number is (212) 526-7000. See
"Structured Asset Securities Corporation" in
the accompanying prospectus.
THE ISSUER............................... LB Commercial Mortgage Trust
_________________, an owner trust
established by us under the laws of the
State of ______________ under the deposit
trust agreement. We initially will own 100%
of the beneficial interests in the issuer.
See "Description of the Offered Bonds--The
Issuer" in this prospectus supplement and
"The Issuers" in the accompanying
prospectus.
OWNER TRUSTEE............................ ________________________. See "Description
of the Offered Bonds--The Owner Trustee" in
this prospectus supplement.
BOND TRUSTEE............................. ________________________, will act as the
initial bond trustee on behalf of all the
series--bondholders . See "Description of
the Bonds--The Bond Trustee" in the
accompanying prospectus. The bond trustee
will also have, or be responsible for
appointing an agent to perform, additional
duties with respect to tax administration.
INITIAL MASTER SERVICER.................. ________________________, a ________
corporation, will act as the initial master
servicer with respect to the pledged
mortgage loans. See "Servicing of the
Pledged Mortgage Loans--The Initial Master
Servicer and the Initial Special Servicer"
in this prospectus supplement.
INITIAL SPECIAL SERVICER................. ________________________, a __________
corporation, will act as the initial special
servicer with respect to the pledged
mortgage loans. See "Servicing of the
Pledged Mortgage Loans--The Initial Master
Servicer and the Initial Special Servicer"
in this prospectus supplement.
</TABLE>
S-13
<PAGE>
<TABLE>
<S> <C>
MORTGAGE LOAN SELLERS.................... We will acquire the pledged mortgage loans,
from _____________________________.
- ________________________, a __________
corporation, and
- ________________________, a __________
corporation.
See "Description of the Mortgage
Collateral--The Mortgage Loan Sellers" in
this prospectus supplement.
UNDERWRITER.............................. Lehman Brothers Inc., a Delaware
corporation, is the underwriter of this
offering. See "Method of Distribution" in
this prospectus supplement.
RELEVANT DATES AND PERIODS
CUT-OFF DATE............................. The mortgage collateral will be considered
part of the trust estate as of a cut-off
date of _____________. All payments and
collections received on the mortgage
collateral after that date, excluding any
payments or collections that represent
amounts due on or before that date, will be
available for payment on the offered bonds.
Accordingly, ____________ is the date as of
which we present much of the information
relating to the mortgage collateral and the
underlying real properties in this
prospectus supplement.
ISSUE DATE............................... The date of initial issuance for the offered
bonds will be on or about ____________.
PAYMENT DATE............................. Payments on the offered bonds are scheduled
to occur monthly, commencing in
_____________. During any given month, the
payment date will be the ______ calendar day
of that month or, if the _______ calendar
day of that month is not a business day,
then the next succeeding business day.
RECORD DATE.............................. The record date for each monthly payment on
an offered bond will be the last business
day of the prior calendar month. The
registered holders of the offered bonds at
the close of business on each record date,
will be entitled to receive any payments on
those bonds on the following payment date.
COLLECTION PERIOD........................ Amounts available for payment on the offered
bonds on any payment date will depend on the
payments and other collections received, and
any advances of payments due, on the
mortgage collateral and other assets
included in the trust estate during the
</TABLE>
S-14
<PAGE>
<TABLE>
<S> <C>
related collection period. Each collection period--
- will relate to a particular payment date,
- will be approximately one month long,
- will begin when the prior collection period ends
or, in the case of the first collection period,
will begin on ______________, and
- will end during the month of, but prior to, the
related payment date.
INTEREST ACCRUAL PERIOD.................. The amount of interest payable with respect
to the offered bonds on any payment date
will be a function of the interest accrued
during the related interest accrual period.
The interest accrual period for any payment
date will be the calendar month immediately
preceding the month in which that payment
date occurs.
</TABLE>
DESCRIPTION OF THE OFFERED BONDS
REGISTRATION AND
S-15
<PAGE>
<TABLE>
<S> <C>
DENOMINATIONS....................... We intend to deliver the offered bonds in
book-entry form in original denominations
of:
- in the case of the class X bonds, $________
initial notional amount and in any whole dollar
denomination in excess of $__________; and
- in the case of the other offered bonds,
$_________ initial principal balance and in
any whole dollar denomination in excess of
$____________.
You will initially hold your offered bonds
through The Depository Trust Company. As a
result, you will not receive a fully
registered physical security representing
your interest in any offered bond, except
under the limited circumstances described
under "Description of the Offered
Bonds--Registration and Denominations" in
this prospectus supplement and under
"Description of the Bonds-Book Entry
Registration" in the accompanying
prospectus. We may elect to terminate the
book-entry system through DTC with respect
to any portion of any class of offered
bonds.
PAYMENTS
A. GENERAL.............................. The bond trustee will make payments of
interest and principal to the respective
classes of series __________ bondholders
entitled to those payments, sequentially as
follows:
</TABLE>
S-16
<PAGE>
<TABLE>
<CAPTION>
PAYMENT ORDER CLASS
------------- -----
<S> <C> <C>
1 A-1, A-2 and X
2 B
3 C
4 D
5 E
6 F
7 G
8 H
9 J
10 K
11 L
12 M
13 N
</TABLE>
<TABLE>
<S> <C>
Allocation of interest payments among the
class A-1, A-2 and X bonds is PRO RATA based
on entitlement. The class X bonds do not
have principal balances and do not entitle
their holders to payments of principal.
See "Description of the Offered
Bonds--Payments--Priority of Payments" in
this prospectus supplement.
B. PAYMENTS OF INTEREST................. Each class of offered bonds will bear
interest. In each case, that interest will
accrue during each interest accrual period
based upon--
- the interest rate applicable for the
particular class for that interest accrual
period,
- the total principal balance or notional amount,
as the case may be, of the particular class
outstanding immediately prior to the related
payment date, and
- the total principal balance or notional amount,
as the case may be, of the particular class
outstanding immediately prior to the related
payment date, and
- the assumption that each year consists of 12
30-day months.
</TABLE>
S-17
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<S> <C>
A whole or partial prepayment on any pledged
mortgage loan may not be accompanied by the
amount of one full month's interest on the
prepayment. As and to the extent described
under "Description of the Offered
Bonds-Payments-Payments of Interest" in this
prospectus supplement, these shortfalls may
be allocated to reduce the amount of accrued
interest otherwise payable to the holders of
all of the interest-bearing classes of the
series ______ bonds, including the offered
bonds, on a PRO RATA basis in accordance
with the respective amounts of interest
otherwise payable on those classes for the
corresponding interest accrual period.
On each payment date, subject to available
funds and the payment priorities described
under "-Payments-General" above, you will be
entitled to receive your proportionate share
of all unpaid distributable interest accrued
with respect to your class of offered bonds
through the end of the related interest
accrual period.
See "Description of the Offered
Bonds--Payments--Payments of Interest" and
"--Payments--Priority of Payments" in this
prospectus supplement.
C. PAYMENTS OF PRINCIPAL................ The class X bonds do not have principal
balances and do not entitle their holders to
payments of principal. Subject to available
funds and the payment priorities described
under "-Payments-General" above, however,
the holders of each other class of offered
bonds will be entitled to receive a total
amount of principal over time equal to the
total principal balance of their particular
class. The bond trustee must make payments
of principal in a specified sequential order
to ensure that--
- no payments of principal will be made to the
holders of any non-offered class of series
_________ bonds until the total principal
balance of the offered bonds is reduced to
zero,
- no payments of principal will be made to the
holders of the class B, C, D, E or F
</TABLE>
S-18
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<TABLE>
<S> <C>
bonds until, in the case of each of those classes,
the total principal balance of all more
senior classes of offered bonds is reduced
to zero, and
- except as described in the following
paragraph, no payments of principal will be
made to the holders of the class A-2 bonds
until the total principal balance of the
class A-1 bonds is reduced to zero.
Because of losses on the mortgage collateral
and/or default-related or other
unanticipated expenses of the trust estate,
the total principal balance of the class B,
C, D, E, F, G H, J, K, L, M and N bonds
could be reduced to zero at a time when the
class A-1 and A-2 bonds remain outstanding.
Under those circumstances any payments of
principal on the class A-1 and A-2 bonds
will be made on a PRO RATA basis in
accordance with their respective principal
balances.
The total payments of principal to be made
on the series __________ bonds on any
payment date will be a function of--
- the amount of scheduled payments of
principal due or, in some cases, deemed due
on the pledged mortgage loans during the
related collection period, which payments
are either received as of the end of that
collection period or advanced by the master
servicer, and
- the amount of any prepayments and other
unscheduled collections of previously
unadvanced principal with respect to the
pledged mortgage loans that are received
during the related collection period.
See "Description of the Offered
Bonds--Payments--Payments of Principal" and
"--Payments--Priority of Payments" in this
prospectus supplement.
</TABLE>
S-19
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<TABLE>
<S> <C>
D. PAYMENTS OF PREPAYMENT
PREMIUMS AND YIELD
MAINTENANCE CHARGES.................. If any prepayment premium or yield
maintenance charge is collected on any of
the pledged mortgage loans, then the bond
trustee will pay that amount in the
proportions described "Description of the
Offered Bonds--Payments--Payments of
Prepayment Premiums and Yield Maintenance
Charges" in this prospectus supplement, to--
- the holders of the class X bonds, and/or
- the holders of any other class or classes
of bonds, senior to the class ___ bonds, that
are then entitled to receive payments of
principal.
</TABLE>
S-20
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<TABLE>
<S> <C>
REDUCTIONS OF BOND BALANCES
IN CONNECTION WITH LOSSES
ON THE PLEDGED MORTGAGE
LOANS AND DEFAULT-RELATED
AND OTHER UNANTICIPATED
EXPENSES............................ Because of losses on the mortgage collateral
and/or default-related and other
unanticipated expenses of the trust estate,
the total principal balance of the mortgage
collateral, net of advances of principal,
may fall below the total principal balance
of the series _____ bonds. If and to the
extent that those losses and expenses cause
a deficit to exist following the payments
made on the series _____ bonds on any
payment date, then the total principal
balances of the following classes of series
_____ bonds, will be successively reduced in
the following order, until that deficit is
eliminated:
</TABLE>
<TABLE>
<CAPTION>
REDUCTION ORDER CLASS
--------------- -----
<S> <C> <C>
1 N
2 M
3 L
4 K
5 J
6 H
7 G
8 F
9 E
10 D
11 C
12 B
13 A-1 and A-2
</TABLE>
<TABLE>
<S> <C>
Any reduction to the total principal
balances of the class A-1 and class A-2
bonds will be made on a PRO RATA basis in
accordance with the relative sizes of those
principal balances.
See "Description of the Offered
Bonds--Reductions of Bond Principal Balances
in Connection With
</TABLE>
S-21
<PAGE>
<TABLE>
<S> <C>
Realized Losses and Additional Trust Estate Expenses"
in this prospectus supplement.
ADVANCES OF DELINQUENT MONTHLY
DEBT SERVICE PAYMENTS............... Except as described in the next two
paragraphs, the master servicer will be
required to make advances with respect to
any delinquent monthly payments, other than
balloon payments, of principal and/or
interest due or deemed due on the mortgage
collateral. In addition, the trustee must
make any of those advances that the master
servicer fails to make. As described under
"Description of the Offered Bonds-Advances
of Delinquent Monthly Debt Service Payments"
in this prospectus supplement, any party
that makes an advance will be entitled to be
reimbursed for the advance, together with
interest at the prime rate described in that
section of this prospectus supplement.
Notwithstanding the foregoing, neither of
the master servicer nor the bond trustee,
will be required to make any advance that it
determines, in its good faith and reasonable
judgment, will not be recoverable from
proceeds of the related mortgage collateral.
In addition, if any of the adverse events or
circumstances that we describe under
"Servicing of the Pledged Mortgage
Loans-Required Appraisals" in this
prospectus supplement, occur or exist with
respect to any pledged mortgage loan
included in the trust estate or the
underlying real property for that loan, the
special servicer will be obligated to obtain
a new appraisal of or, in cases involving
relatively small principal balances conduct
a valuation of that property. If, based on
that appraisal or other valuation, it is
determined that-
</TABLE>
S-22
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<TABLE>
<S> <C>
- the principal balance of, and other delinquent
amounts due under, that mortgage loan exceed
- 90% of the new estimated value of that real property.
Then the amount otherwise required to be
advanced with respect to interest on that
mortgage loan will be reduced. The reduction
will be in the same proportion that the
excess bears to the principal balance of the
mortgage loan, net of related advances of
principal. Due to the payment priorities,
any reduction in advances will reduce the
funds available to pay interest on the most
subordinate interest-bearing class of series
_____ bonds then outstanding.
See "Description of the Offered
Bonds--Advances of Delinquent Monthly Debt
Service Payments" and "Servicing of the
Pledged Mortgage Loans--Required Appraisals"
in this prospectus supplement. See also
"Description of the Bonds--Advances in
Respect of Delinquencies" in the
accompanying prospectus.
REPORTS TO BONDHOLDERS................... On each payment date, the following reports
will be available to you and will contain
the information described under "Description
of the Offered Bonds--Reports to
Bondholders; Available Information" in this
prospectus supplement:
- Delinquent Loan Status Report
- Historical Loan Modification Report
- Historical Liquidation Report
- REO Status Report
- Services Watch List Report
- Loan Payoff Notification Report
</TABLE>
S-23
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<TABLE>
<S> <C>
- Comparative Financial Status Report
- Operating Statement Analysis Report
Upon reasonable prior notice, you may also
review at the bond trustee's offices during
normal business hours a variety of
information and documents that pertain to
the mortgage collateral and the underlying
real properties. We expect that the
available information and documents will
include loan documents, borrower operating
statements, rent rolls and property
inspection reports, to the extent received
by the bond trustee.
See "Description of the Offered
Bonds--Reports to Bondholders; Available
Information" in this prospectus supplement.
OPTIONAL REDEMPTION...................... The Issuer may, at its option, redeem any
class of offered bonds, in whole but not in
part, on any payment date, if--
- the total principal balance of the bonds to
be redeemed is less than ____% of the
initial total principal balance of that
class, and
- no event of default under the indenture has
occurred and is continuing.
See "Description of the Offered
Bonds--Optional Redemption" in this
prospectus supplement.
[Provide summary description of any
circumstances in which the offered bonds
will be subject to special or mandatory
redemption.].
THE MORTGAGE COLLATERAL
PLEDGED MORTGAGE LOANS................... In this section "-The Mortgage Collateral",
we provide summary information with respect
to the pledged mortgage loans
</TABLE>
S-24
<PAGE>
<TABLE>
<S> <C>
that we intend to include in the trust. For
more detailed information regarding those
pledged mortgage loans, you should review
the following sections in this prospectus
supplement:
- "Description of the Mortgage Collateral".
- "Risk Factors - Risks Related to the Pledged
Mortgage Loans".
- Annex A-1-Certain Characteristics of the
Pledged Mortgage Loans.
- Annex A-2-Certain Monetary Terms of the Pledged
Mortgage Loans.
When reviewing the information we have
included in this prospectus supplement with
respect to the pledged mortgage loans,
please note that--
- All numerical information provided with
respect to the mortgage loans is provided on
an approximate basis.
- All weighted average information provided
with respect to the mortgage loans or any
sub-group of mortgage loans reflects a
weighting based on their respective cut-off
date principal balances. The
</TABLE>
S-25
<PAGE>
<TABLE>
<S> <C>
issuer will transfer the cut-off date
principal balance for each of the pledged
mortgage loans to the trust. We show the
cut-off date principal balance for each of
the mortgage loans on Annex A-1 to this
prospectus supplement.
- When information with respect to the
underlying real properties is expressed as a
percentage of the initial mortgage
collateral balance, the percentages are
based upon the cut-off date principal
balances of the related mortgage loans.
- If any of the mortgage loans is secured by
multiple real properties located in more
than one state, a portion of that mortgage
loan has been allocated to each of those
properties.
- Statistical information regarding the
pledged mortgage loans may change prior to
the date of initial issuance of the offered
bonds due to changes in the composition of
the mortgage collateral prior to that date.
SOURCE OF THE
PLEDGED MORTGAGE LOANS................ We are not the originator of the pledged
mortgage loans to be included in the trust
estate. We will acquire those pledged
mortgage loans from _____ separate parties.
Each of those pledged mortgage loans was
originated by--
- the related mortgage loan seller from whom
we acquired the mortgage loan,
</TABLE>
S-26
<PAGE>
<TABLE>
<S> <C>
- an affiliate of the related mortgage loan seller, or
- a correspondent in the related mortgage loan
seller's conduit lending program.
PAYMENT TERMS OF THE
MORTGAGE LOANS........................... Each of the pledged mortgage loans to be
included in the trust estate is the
obligation of a borrower to repay a
specified sum with interest.
Repayment of each of the pledged mortgage
loans is secured by a mortgage lien on the
ownership and/or leasehold interest of the
related borrower or another party in one or
more commercial or multifamily real
properties. Except for limited permitted
encumbrances, which we describe in the
"Glossary" to this prospectus supplement,
that mortgage lien will be a first priority
lien.
All of the pledged mortgage loans are or
should be considered nonrecourse. None of
the pledged mortgage loans are insured or
guaranteed by any governmental agency or
instrumentality or by any private mortgage
insurer.
Each of the pledged mortgage loans currently
accrues interest at the annual rate
specified with respect to that loan on Annex
A-1 to this prospectus supplement. Except as
otherwise described below with respect to
pledged mortgage loans that have anticipated
repayment dates, the mortgage interest rate
for each mortgage loan is, in the absence of
default, fixed for the entire term of the
loan. [IF ANY OF THE MORTGAGE LOANS HAVE
FLOATING OR ADJUSTABLE MORTGAGE INTEREST
RATES PROVIDE SUMMARY DESCRIPTION OF HOW TO
CALCULATE THOSE RATES.]
Each of the pledged mortgage loans provides
for scheduled payments of principal and/or
interest to be due on the ______ day of each
month. [PROVIDE SUMMARY DESCRIPTION
REGARDING ANY ADJUSTMENTS TO THE MONTHLY
DEBT SERVICE PAYMENTS AND ANY POTENTIAL
NEGATIVE AMORTIZATION OF INTEREST.]
________ of the pledged mortgage loans,
representing ____% of the initial mortgage
collateral balance, provide for:
- an amortization schedule that is
significantly longer than its remaining term
to stated maturity; and
</TABLE>
S-27
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<S> <C>
- a substantial payment of principal on its
maturity date.
________ of the pledged mortgage loans,
representing ____% of the initial mortgage
collateral balance, provide material
incentives to the related borrower to pay
the pledged mortgage loan in full by a
specified date. We consider that date to be
the anticipated repayment date for the
pledged mortgage loan. There can be no
assurance, however, that these incentives
will result in any of these pledged mortgage
loans being paid in full on or before its
anticipated repayment date. The incentives,
which in each case will become effective as
of the related anticipated repayment date,
include:
- The calculation of interest in excess of the
initial mortgage interest rate. The
additional interest will be deferred and
will be payable only after the outstanding
principal balance of the mortgage loan is
paid in full.
- The application of excess cash flow from the
underlying real property to pay the
principal amount of the mortgage loan. The
payment of principal will be in addition to
the principal portion of the normal monthly
debt service payment.
The remaining ______ pledged mortgage loans,
representing ____% of the initial mortgage
collateral balance, have payment schedules
that provide for the payment of these
mortgage loans in full or substantially in
full by their respective maturity dates.
DELINQUENCY STATUS....................... None of the mortgage loans to be included in
the trust estate was _____ days or more
delinquent with respect to any monthly debt
service payment as of the cut-off date or at
any time during the _____-month period
preceding that date.
</TABLE>
S-28
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<TABLE>
<S> <C>
PREPAYMENT LOCK-OUT PERIODS.............. A prepayment lock-out period is currently in
effect for ________ of the mortgage loans to
be included in the trust estate. Set forth
below is information regarding the remaining
terms of those lock-out periods:
Maximum remaining lock-out period: months
Minimum remaining lock-out period: months
Weighted average remaining lock-out period: months
DEFEASANCE............................... ________ of the mortgage loans to be
included in the trust estate, representing
____% of the initial mortgage collateral
balance, permit the related borrower to
obtain a full or partial release of the
underlying real property from the related
mortgage lien by delivering U.S. Treasury
obligations as substitute collateral. None
of these pledged the mortgage loans permits
defeasance prior to the _______ anniversary
of the date of initial issuance of the bonds.
ADDITIONAL STATISTICAL INFORMATION
A. GENERAL CHARACTERISTICS.............. The mortgage collateral will have the
following general characteristics as of the
cut-off date:
Initial mortgage collateral balance........................... $
Number of mortgage loans......................................
Number of underlying real properties..........................
Maximum cut-off date principal balance........................ $
Minimum cut-off date principal balance........................ $
Average cut-off date principal balance........................
Maximum mortgage interest rate................................ %
Minimum mortgage interest rate................................ %
Weighted average mortgage interest rate....................... %
Maximum original term to maturity or
anticipated repayment date............................... months
Minimum original term to maturity or
anticipated repayment date............................... months
Weighted average original term to maturity or
anticipated repayment date............................... months
</TABLE>
S-29
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<S> <C>
Maximum remaining term to maturity or
anticipated repayment date............................... months
Minimum remaining term to maturity or
anticipated repayment date............................... months
Weighted average remaining term to maturity or
anticipated repayment date............................... months
Maximum underwritten debt service
coverage ratio........................................... x
Minimum underwritten debt service
coverage ratio........................................... x
Weighted average underwritten debt service
coverage ratio........................................... x
Maximum cut-off date loan-to-
appraised value ratio.................................... %
Minimum cut-off date loan-to-appraised
value ratio.............................................. %
Weighted average cut-off date
appraised loan-to-value ratio............................ %
</TABLE>
S-30
<PAGE>
<TABLE>
<S> <C>
C. STATE CONCENTRATION.................. The table below shows the number of, and
percentage of the initial mortgage
collateral balance secured by, underlying
real properties located in the indicated
states:
% OF
NUMBER OF INITIAL MORTGAGE
STATE PROPERTIES COLLATERAL BALANCE
----- ---------- ------------------
%
%
%
The remaining underlying real properties
with respect to the mortgage collateral are
located throughout ______ other states and
______________. No more than ____% of the
initial mortgage collateral balance is
secured by underlying real properties
located in any of these other jurisdictions.
D. PROPERTY TYPES....................... The table below shows the number of mortgage
loans, and percentage of the initial
mortgage collateral balance secured by,
underlying real properties operated for each
indicated purpose:
% OF
NUMBER OF INITIAL MORTGAGE
PROPERTY TYPE PROPERTIES COLLATERAL BALANCE
------------- ---------- ------------------
%
%
%
%
%
%
%
%
</TABLE>
S-31
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<TABLE>
<CAPTION>
<S> <C>
E. ENCUMBERED INTERESTS.................... The table below shows the number of mortgage loans, and percentage of the initial
mortgage collateral balance secured by, underlying real properties for which the
encumbered interest is as indicated:
</TABLE>
<TABLE>
<CAPTION>
% OF
ENCUMBERED INTEREST IN THE NUMBER OF INITIAL MORTGAGE
UNDERLYING REAL PROPERTY PROPERTIES COLLATERAL BALANCE
-------------------------- ---------- ------------------
<S> <C> <C>
Ownership %
Ownership in part,
Leasehold in part %
Leasehold %
Other %
</TABLE>
LEGAL AND INVESTMENT CONSIDERATIONS
<TABLE>
<CAPTION>
<S> <C>
FEDERAL INCOME
TAX CONSEQUENCES......................... The bond trustee or its agent will make elections to treat designated portions of the
trust estate as three separate real estate mortgage investment conduits under
Sections 860A through 860G of the Internal Revenue Code of 1986. The designations for
each of those three REMICs are as follows:
- REMIC I, the lowest tier REMIC, which will consist of, among other things--
1. the pledged mortgage loans, and
2. any underlying real properties that may be acquired as part of the trust estate
following a borrower default,
but will exclude collections of additional interest accrued and deferred as to
payment with respect to each pledged mortgage loan with an anticipated repayment
date that remains outstanding past that date;
</TABLE>
S-32
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<TABLE>
<CAPTION>
<S> <C>
- REMIC II, which will hold the regular interests in REMIC I; and
- REMIC III, which will hold the regular interests in REMIC II.
The offered bonds will be treated as regular interests in REMIC III. This means
that they will be treated as newly issued debt instruments for federal income tax
purposes. You will have to report income on your offered bonds in accordance with
the accrual method of accounting even if you are otherwise a cash method taxpayer.
The class _____ and _____ bonds will be issued with more than a DE MINIMIS amount
of original issue discount. The class _____ bonds will be issued with a DE MINIMIS
amount of original issue discount. The other offered bonds will not be issued with
any original issue discount. If you own an offered bond issued with original issue
discount, you may have to report original issue discount income and be subject to a
tax on this income before you receive a corresponding cash payment.
For a more detailed discussion of the federal income tax aspects of investing in
the offered bonds, see "Federal Income Tax Consequences" in this prospectus
supplement and "Federal Income Tax Consequences" in the accompanying prospectus.
ERISA....................................... We anticipate that, subject to satisfaction of the conditions referred to under
"ERISA Considerations" in this prospectus supplement, retirement plans and other
employee benefit plans and arrangements subject to--
- Title I of the Employee Retirement Income Security Act of 1974, as amended, or
- Section 4975 of the Internal Revenue Code of 1986,
will be able to invest in the class A-1, A-2 and X bonds without giving rise to a
prohibited transaction. This is based upon an individual prohibited transaction
exemption granted to the underwriter by the U.S. Department of Labor. However,
Investments in the offered bonds by, on behalf of or with assets of these entities,
may be restricted as described under
</TABLE>
S-33
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
"ERISA Considerations" in this prospectus supplement.
If you are a fiduciary of any retirement plan or other employee benefit plan or
arrangement subject to Title I of ERISA or section 4975 of the Internal Revenue
Code of 1986, you should review carefully with your legal advisors whether the
purchase or holding of the offered bonds could give rise to a transaction that is
prohibited under ERISA or Section 4975 of the Internal Revenue Code of 1986. See
"ERISA Considerations" in this prospectus supplement and in the accompanying
prospectus.
LEGAL INVESTMENT............................ [Upon initial issuance, the following classes of offered bonds, will constitute
mortgage related securities for purposes of the Secondary Mortgage Market
Enhancement Act of 1984:
- class A-1,
- class A-2, and
- class B.
The other offered bonds will NOT be "mortgage related securities" within the
meaning of SMMEA.]
You should consult your own legal advisors to determine whether and to what extent
the offered bonds will be legal investments for you. See "Legal Investment" in this
prospectus supplement and in the accompanying prospectus.
CERTAIN INVESTMENT
CONSIDERATIONS........................... The rate and timing of payments and other collections of principal on or with
respect to the mortgage collateral will affect the yield to maturity on each
offered bond. In the case of offered bonds purchased at a discount, a slower than
anticipated rate of payments and other collections of principal on the mortgage
collateral could result in a lower than anticipated yield. In the case of class X
bonds or any other offered bonds purchased at a premium, a faster than anticipated
rate of payments and other collections of principal on the mortgage collateral
could result in a lower than anticipated yield. If you are contemplating the
purchase of class X bonds, you should be aware that--
</TABLE>
S-34
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- the yield to maturity on those bonds will be highly sensitive to the rate and
timing of principal prepayments and other liquidations on or with respect to the
mortgage collateral, and
- that an extremely rapid rate of prepayments and/or other liquidations on or with
respect to the mortgage collateral could result in a substantial loss of your
initial investment.
See "Yield and Maturity Considerations" in this prospectus supplement and in the
accompanying prospectus.
</TABLE>
S-35
<PAGE>
RISK FACTORS
The offered bonds are not suitable investments for all investors. In
particular, you should not purchase any class of offered bonds unless you
understand and are able to bear the risks associated with that class.
The offered bonds are complex securities and it is important that you
possess, either alone or together with an investment advisor, the expertise
necessary to evaluate the information contained in this prospectus supplement
and the accompanying prospectus in the context of your financial situation.
You should consider the following factors, as well as those set forth
under "Risk Factors" in the accompanying prospectus, in deciding whether to
purchase any offered bonds. The "Risk Factors" section in the accompanying
prospectus includes a number of general risks associated with making an
investment in the offered bonds.
RISKS RELATED TO THE OFFERED BONDS
S-36
<PAGE>
THE CLASS B, C, D, E AND F BONDS ARE SUBORDINATE TO, AND ARE THEREFORE
RISKIER THAN, THE CLASS A-1, A-2 AND X BONDS. If you purchase class B, C, D, E
or F bonds, then your offered bonds will provide credit support to other classes
of offered bonds. As a result, you will receive payments after, and must bear
the effects of losses on the pledged mortgage loans before, the holders of those
other classes of offered bonds.
When making an investment decision, you should consider, among other
things--
- the payment priorities of the respective classes of the bonds,
- the order in which the principal balances of the respective
classes of the bonds with balances will be reduced in connection
with losses and default-related shortfalls, and
- the characteristics and quality of the mortgage collateral in the
trust.
S-37
<PAGE>
See "Description of the Mortgage Collateral" and "Description of the
Offered Bonds--Payments" and "--Reductions of Bond Principal Balances in
Connection With Realized Losses and Additional Trust Estate Expenses" in this
prospectus supplement. See also "Risk Factors--The Investment Performance of
Your Offered Bonds Will Depend Upon Payments, Defaults and Losses on the Related
Mortgage Loans; and Those Payments, Defaults and Losses may be Highly
Unpredictable", "--Any Credit Support for Your Offered Bonds may be Insufficient
to Protect you Against all Potential Losses" and "--Payments on the Offered
Bonds Will be Made Solely from the Limited Assets of the Related Trust Estate,
and Those Assets may be Insufficient to Make all Required Payments on Those
Bonds" in the accompanying prospectus.
THE OFFERED BONDS HAVE UNCERTAIN YIELDS TO MATURITY. The yield on your
offered bonds will depend on--
- the price you paid for your offered bonds, and
- the rate, timing and amount of payments on your offered bonds.
The rate, timing and amount of payments on your offered bonds will
depend on:
- the interest rate for your offered bonds;
- the rate and timing of payments and other collections of
principal on the mortgage collateral;
- the rate and timing of defaults, and the severity of losses, if
any, on the mortgage collateral;
- the rate, timing, severity and allocation of other shortfalls and
expenses that reduce amounts available for payment on your
offered bonds;
- the collection and payment of prepayment premiums and yield
maintenance charges with respect to the mortgage collateral; and
- servicing decisions with respect to the mortgage collateral.
These factors cannot be predicted with any certainty. Accordingly, you
may find it difficult to analyze the effect that these factors might have on the
yield to maturity of your offered bonds.
See "Description of the Mortgage Collateral", "Servicing of the
Mortgage Loans", "Description of the Offered Bonds--Payments" and "--Reductions
of Bond Principal Balances in Connection With Realized Losses and Additional
Trust Estate Expenses" and "Yield and Maturity Considerations" in this
prospectus supplement. See also "Risk Factors--The Investment Performance of
Your Offered Bonds Will Depend Upon Payments, Defaults and Losses on the Related
Mortgage Loans; and Those Payments, Defaults and
S-38
<PAGE>
Losses may be Highly Unpredictable" and "Yield and Maturity Considerations" in
the accompanying prospectus.
THE INVESTMENT PERFORMANCE OF YOUR BONDS MAY VARY MATERIALLY AND
ADVERSELY FROM YOUR EXPECTATIONS BECAUSE THE RATE OF PREPAYMENTS AND OTHER
UNSCHEDULED COLLECTIONS OF PRINCIPAL ON THE PLEDGED MORTGAGE LOANS IS FASTER OR
SLOWER THAN YOU ANTICIPATED.
If you purchase your offered bonds at a premium, and if payments and
other collections of principal on the mortgage collateral in the trust occur
at a rate faster than you anticipated at the time of your purchase, then your
actual yield to maturity may be lower than you had assumed at the time of
your purchase. Conversely, if you purchase your offered bonds at a discount,
and if payments and other collections of principal on the mortgage collateral
in the trust occur at a rate slower than you anticipated at the time of your
purchase, then your actual yield to maturity may be lower than you had
assumed at the time of your purchase. You should consider that prepayment
premiums and yield maintenance charges may not be collected in all
circumstances. Furthermore, even if a prepayment premium or yield maintenance
charge is collected and payable on your offered bonds, it may not be
sufficient to offset fully any loss in yield on your offered bonds.
If you purchase class X bonds, your yield to maturity will be
particularly sensitive to the rate and timing of principal payments and losses
on the mortgage collateral. Prior to investing in those bonds, you should fully
consider the associated risks, including the risk that an extremely rapid rate
of amortization, prepayment or other liquidation of the mortgage collateral
could result in your failure to recover fully your initial investment. The
ratings on the class X bonds do not address whether a purchaser of those bonds
would be able to recover its initial investment in them.
The yield on the offered bonds with variable interest rates could also
be adversely affected if the mortgage collateral with higher mortgage interest
rates pay principal faster than the mortgage collateral with lower mortgage
interest rates. This is because those classes bear interest at interest rates
equal to, based upon or limited by, as applicable, a weighted average of net
interest rates derived from the mortgage collateral.
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<PAGE>
ERISA CONSIDERATIONS. The regulations that govern pension and other
employee benefit plans subject to ERISA and plans and other retirement
arrangements subject to Section 4975(c) of the Internal Revenue Code of 1986 are
complex. Accordingly, if you are using the assets of a plan or arrangement to
acquire offered bonds, you are urged to consult legal counsel regarding
consequences under ERISA and the Internal Revenue Code of 1986 of the
acquisition, ownership and disposition of those bonds. The purchase or holding
of offered bonds by any plan or arrangement may result in a prohibited
transaction or the imposition of excise taxes or civil penalties. See "ERISA
Considerations" in this prospectus supplement and in the accompanying
prospectus.
RISKS RELATED TO THE PLEDGED MORTGAGE LOANS
REPAYMENT OF THE PLEDGED MORTGAGE LOANS DEPENDS ON THE OPERATION OF THE
UNDERLYING REAL PROPERTIES. The pledged mortgage loans are secured by mortgage
liens on ownership and/or leasehold interests in the following types of real
property:
[SPECIFY PROPERTY TYPES.]
The risks associated with lending on these types of real properties are
inherently different from those associated with lending on the security of
single-family residential properties. This is because, among other reasons,
repayment of each of the pledged mortgage loans is dependent on--
- the successful operation and value of the underlying real
property, and
- the related borrower's ability to sell or refinance the
underlying real property.
See "Risk Factors--Repayment of a Commercial or Multifamily Mortgage
Loan Depends Upon the Performance and Value of the Underlying Real Property,
Which may Decline Over Time, and the Related Borrower's Ability to Refinance the
Property, of Which There is no Assurance"
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and "Description of the Trust Estates--Mortgage Loans--A Discussion of
Various Types of Multifamily and Commercial Properties That May Secure
Mortgage Loans Underlying a Series of Offered Bonds" in the accompanying
prospectus.
THE PLEDGED MORTGAGE LOANS HAVE A VARIETY OF CHARACTERISTICS WHICH MAY
EXPOSE INVESTORS TO GREATER RISK OF DEFAULT AND LOSS. When making an investment
decision, you should consider, among other things, the following characteristics
of the pledged mortgage loans and/or the underlying real properties for those
loans. Any or all of these characteristics can affect, perhaps materially and
adversely, the investment performance of your offered bonds. Each of the
respective items below includes a cross-reference to where the associated risks
are further discussed in this prospectus supplement or in the accompanying
prospectus. In addition, each of those items may include a cross reference to
where further information about the particular characteristic may be found in
this prospectus supplement.
- THE UNDERLYING REAL PROPERTY WILL BE THE SOLE ASSET AVAILABLE TO
SATISFY THE AMOUNTS OWING UNDER A PLEDGED MORTGAGE LOAN IN THE EVENT
OF DEFAULT. All of the mortgage loans to be included in the trust
estate are or should be considered nonrecourse loans. If the related
borrower defaults on any of the pledged mortgage loans, only the
underlying real property, and not the other assets of the borrower, is
available to satisfy the debt. Even if the related loan documents
permit recourse to the borrower or a guarantor, the trust estate may
not be able to ultimately collect the amount due under a defaulted
mortgage loan. None of the mortgage loans are insured or guaranteed by
any governmental agency or instrumentality or by any private mortgage
insurer. See "Risk Factors--Repayment of a Commercial or Multifamily
Mortgage Loan Depends Upon the Performance and Value of the Underlying
Real Property, Which may Decline Over Time and the Related Borrower's
Ability to Refinance the Property, of Which There is no
Assurance--Most of the Mortgage Loans Underlying Your Offered Bonds
Will be Nonrecourse" in the accompanying prospectus.
- IN SOME CASES, AN UNDERLYING REAL PROPERTY IS DEPENDENT ON A SINGLE
TENANT OR ON ONE OR A FEW MAJOR TENANTS. In the case of ________
pledged mortgage loans, representing ____% of the initial mortgage
collateral balance, the related borrower has leased the property to at
least one tenant that occupies ____% or more of the particular
property. In the case of ______ of those properties securing ____% of
the initial mortgage collateral balance, the related borrower has
leased the particular property to a single tenant that occupies all or
substantially all of it. Accordingly, the full and timely payment of
each of the related mortgage loans is highly dependent on the
continued operation of the major tenant or tenants, which, in some
cases, is the sole tenant, at the underlying real property. See "Risk
Factors--Repayment of a Commercial or Multifamily Mortgage Loan
Depends Upon the Performance and Value of the Underlying Real
Property, Which may Decline Over Time and the Related Borrower's
Ability to Refinance the Property, of Which There is no Assurance--The
Successful Operation of a Multifamily or Commercial Property Depends
on Tenants", "--Repayment of a Commercial or Multifamily Mortgage
Loan Depends Upon the Performance and Value of the Underlying Real
Property, Which may Decline Over Time and the Related Borrower's
Ability to Refinance the Property, of Which There
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<PAGE>
is no Assurance--Dependence on a Single Tenant or a Small Number of
Tenants Makes a Property Riskier Collateral" and "--Repayment of a
Commercial or Multifamily Mortgage Loan Depends Upon the Performance
and Value of the Underlying Real Property, Which may Decline Over Time
and the Related Borrower's Ability to Refinance the Property, of Which
There is no Assurance--Tenant Bankruptcy Adversely Affects Property
Performance" in the accompanying prospectus.
- ____% OR MORE OF THE INITIAL MORTGAGE COLLATERAL BALANCE WILL BE
SECURED BY MORTGAGE LIENS ON EACH OF THE FOLLOWING PROPERTY
TYPES--[SPECIFY PROPERTY TYPES]. [ADD DISCLOSURE RELATING TO EACH
PROPERTY TYPE AS TO WHICH THERE EXISTS A MATERIAL CONCENTRATION BASED
ON CUT-OFF DATE PRINCIPAL BALANCES OF THE PLEDGED MORTGAGE LOANS THAT
SECURE OR UNDERLIE THE SECURITY FOR THE OFFERED BONDS.]
The inclusion in the trust estate of a significant concentration of
mortgage loans that are secured by mortgage liens on a particular type
of income-producing property makes the overall performance of the
mortgage collateral materially more dependent on the factors that
affect the operations at and value of that property type. See
"Description of the Trust Estates--Mortgage Loans--A Discussion of
Various Types of Multifamily and Commercial Properties That May Secure
Mortgage Loans Underlying a Series of Offered Bonds" in the
accompanying prospectus.
- ____% OR MORE OF THE INITIAL MORTGAGE COLLATERAL BALANCE WILL BE
SECURED BY MORTGAGE LIENS ON REAL PROPERTY LOCATED IN EACH OF THE
FOLLOWING STATES--[specify estates]. The underlying real properties
located in each of the following states secure mortgage loans or
allocated portions of mortgage loans that represent ____% or more of
the initial mortgage collateral balance:
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL MORTGAGE
STATE PROPERTIES COLLATERAL BALANCE
----- ---------- ------------------
<S> <C> <C>
</TABLE>
The inclusion in the trust estate of a significant concentration of
mortgage loans that are secured by mortgage liens on real properties
located in a particular state makes the overall performance of the
mortgage collateral materially more depending on economic and other
conditions or events in that state. See "Risk Factors--Geographic
Concentration Within a Trust Estate Exposes Investors to Greater Risk
of Default and Loss" in the accompanying prospectus.
- THE TRUST ESTATE WILL INCLUDE ADJUSTABLE RATE MORTGAGE LOANS. ________
of the mortgage loans, representing ____% of the initial mortgage
collateral balance, provide for adjustments to their respective
mortgage interest rates and corresponding adjustments
S-42
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to their respective monthly debt service payments. See "Risk
Factors--Adjustable Rate Mortgage Loans May Entail Greater Risks of
Default to Lenders than Fixed Rate Mortgage Loans" in the accompanying
prospectus.
- THE TRUST ESTATE WILL INCLUDE MATERIAL CONCENTRATIONS OF BALLOON LOANS
AND LOANS WITH ANTICIPATED REPAYMENT DATES. ________ mortgage loans,
representing ____% of the initial mortgage collateral balance, are
balloon loans. In addition, ________ mortgage loans, representing
____% of the initial mortgage collateral balance, provide material
incentives for the related borrower to repay the loan by an
anticipated repayment date prior to maturity. The ability of a
borrower to make the required balloon payment on a balloon loan at
maturity, and the ability of a borrower to repay a mortgage loan on or
before any related anticipated repayment date, in each case depends
upon its ability either to refinance the loan or to sell the
underlying real property. Although a mortgage loan may provide the
related borrower with incentives to repay the loan by an anticipated
repayment date prior to maturity, the failure of that borrower to do
so will not be a default under that loan. See "Description of the
Pledged Mortgage Collateral--Terms and Conditions of the Pledged
Mortgage Loans" in this prospectus supplement and "Risk Factors--The
Investment Performance of Your Offered Bonds Will Depend Upon
Payments, Defaults and Losses on the Underlying Mortgage Loans; and
Those Payments, Defaults and Losses may be Highly Unpredictable--There
is an Increased Risk of Default Associated with Balloon Payments" in
the accompanying prospectus.
- THE MORTGAGE COLLATERAL WILL INCLUDE SOME DISPROPORTIONATELY LARGE
MORTGAGE LOANS AND GROUPS OF CROSS-COLLATERALIZED MORTGAGE LOANS. The
inclusion in the trust estate of one or more loans that have
outstanding principal balances that are substantially larger than the
other assets that secure or underlie the security for your offered
bonds can result in losses that are more severe, relative to the total
principal balance of the mortgage collateral, than would be the case
if the total balance of the mortgage collateral were distributed more
evenly. The ________ largest mortgage loans and groups of
cross-collateralized mortgage loans to be included in the trust estate
represent ____% of the initial mortgage collateral balance. See
"Description of the Mortgage Collateral--General",
"--Cross-Collateralized Mortgage Loans, Multi-Property Mortgage Loans
and Mortgage Loans With Affiliated Borrowers" and "--Significant
Pledged Mortgage Loans" in this prospectus supplement and "Risk
Factors--Loan Concentration Within a Trust Exposes Investors to
Greater Risk of Default and Loss" in the accompanying prospectus.
- THE MORTGAGE COLLATERAL WILL INCLUDE LEASEHOLD MORTGAGE LOANS.
________ pledged mortgage loans, representing ____% of the initial
mortgage collateral balance, are secured by mortgage liens on the
related borrower's leasehold interest in all or a portion of the
underlying real property, but not by the corresponding ownership
interest in the property that is subject to the ground lease. Because
of possible termination of the related ground lease, lending on a
leasehold interest in a real property is riskier than lending on an
actual ownership interest in that property. See "Description of the
Mortgage Collateral--Additional Loan and Property
S-43
<PAGE>
Information--Leaseholds" in this prospectus supplement. See also "Risk
Factors--Ground Leases Create Risks for Lenders That are not Present
When Lending on an Actual Ownership Interest in a Real Property" and
"Certain Legal Aspects of Mortgage Loans--Foreclosure--Leasehold
Considerations" in the accompanying prospectus.
- SOME OF THE UNDERLYING REAL PROPERTIES ARE LEGAL NONCONFORMING USES
OR LEGAL NONCONFORMING STRUCTURES. __________ pledged mortgage
loans, representing ____% of the initial mortgage collateral balance
are secured by a mortgage lien on a real property that is a legal
nonconforming use or a legal nonconforming structure. This may
impair the ability of the borrower to restore the improvements on an
underlying real property to its current form or use following a major
casualty. See "Description of the Mortgage Collateral--Underwriting
Matters--Zoning and Building Code Compliance" in this prospectus
supplement and "Risk Factors--Changes in Zoning may Adversely Affect
the Use or Value of a Real Property" in the accompanying prospectus.
- SOME OF THE UNDERLYING REAL PROPERTIES ARE ENCUMBERED BY SUBORDINATE
DEBT. ________ mortgage loans, representing ____% of the initial
mortgage collateral balance, are secured by underlying real properties
that are known to us to be encumbered by secured subordinate debt that
is not part of the trust estate. The existence of secured subordinate
indebtedness may adversely affect the borrower's financial viability
and/or the trust estate's security interest in the underlying real
property. Any or all of the following may result from the existence of
secured subordinate indebtedness on an underlying real property.
1. refinancing the related pledged mortgage loan at maturity for the
purpose of making any balloon payments may be more difficult;
2. reduced cash flow could result in deferred maintenance at the
particular real property;
3. if the holder of the subordinated debt files for bankruptcy or is
placed in involuntary receivership, foreclosing on the particular
real property could be delayed; and
4. if the underlying real property depreciates for whatever reason,
the related borrower's equity is more likely to be wiped out,
thereby eliminating the related borrower's incentive to continue
making payments on its mortgage loan.
[The lender of any material subordinate debt on the underlying real
properties known to us has agreed not to foreclose or take other legal
action against the particular real property or the related borrower,
for so long as the related mortgage loan is outstanding and the
special servicer has not done so.]
See "Description of the Mortgage Collateral--Additional Loan and
Property Information--Additional and Other Financing" in this
prospectus supplement and "Risk Factors--Subordinate Debt Increases
the Likelihood That a Borrower Will Default on a Mortgage Loan Backing
Your Offered Bonds" in the accompanying prospectus.
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<PAGE>
- SOME OF THE UNDERLYING REAL PROPERTIES DO NOT COMPLY WITH THE
AMERICANS WITH DISABILITIES ACT OF 1990. Not all of the underlying
real properties securing mortgage loans to be included in the trust
estate, comply with the Americans with Disabilities Act of 1990.
Compliance can be expensive. See "Risk Factors--Compliance With the
Americans With Disabilities Act of 1990 May be Expensive" in the
accompanying prospectus.
- MULTIPLE UNDERLYING REAL PROPERTIES ARE OWNED BY THE SAME BORROWER OR
AFFILIATED BORROWERS OR ARE OCCUPIED, IN WHOLE OR IN PART, BY THE SAME
TENANT OR AFFILIATED Tenants. _______ separate groups of mortgage
loans to be included in the trust estate, have borrowers that, in the
case of each of those groups, are the same or under common control.
See "Description of the Mortgage Collateral--Cross-Collateralized
Mortgage Loans, Multi-Property Mortgage Loans and Mortgage Loans With
Affiliated Borrowers" in this prospectus supplement.
In addition, there may be tenants which lease space at more than one
underlying real property, securing mortgage loans to be included in
the trust estate. Furthermore, there may be tenants that are related
to or affiliated with a borrower. See Annex A-1 to this prospectus
supplement for a list of the ________ most significant tenants at each
of the underlying real properties used for [SPECIFY USE OF
PROPERTIES].
The bankruptcy or insolvency of, or other financial problems with
respect to, any borrower or tenant that is, directly or through
affiliation associated with two or more of the underlying real
properties could have an adverse effect on all of those properties and
on the ability of those properties to produce sufficient cash flow to
make required payments on the related mortgage loans included the
trust estate. See "Risk Factors--Repayment of a Commercial or
Multifamily Mortgage Loan Depends Upon the Performance and Value of
the Underlying Real Property, Which may Decline Over Time and the
Related Borrower's Ability to Refinance the Property, of Which There
is no Assurance--Tenant Bankruptcy Adversely Affects Property
Performance", "--Borrower Concentration Within a Trust Estate Exposes
Investors to Greater Risk of Default and Loss" and "--Borrower
Bankruptcy Proceedings can Delay and Impair Recovery on a Mortgage
Loan Backing Your Offered Bonds" in the accompanying prospectus.
- SOME BORROWERS UNDER THE PLEDGED MORTGAGE LOANS WILL NOT BE SPECIAL
PURPOSE ENTITIES. The business activities of the borrowers under the
pledged mortgage loans with cut-off date principal balances below
$___________, may not be limited to owning their respective underlying
real properties. Accordingly, the financial success of each of those
borrowers may be affected by the performance of its other business
activities, including other real estate interests. Those other
business activities increase the possibility that the borrower may
become bankrupt or insolvent.
CHANGES IN THE MORTGAGE COLLATERAL COMPOSITION CAN CHANGE THE NATURE OF
YOUR INVESTMENT. If you purchase any of class B, C, D, E, F or X bonds other
than the class ____ bonds, you will be more exposed to risks associated with
changes in concentrations of borrower, loan or property
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<PAGE>
characteristics than are persons who own class A-1 and class A-2 bonds. See
"Risk Factors--Changes in Mortgage Collateral Composition Will Change the Nature
of Your Investment" in the accompanying prospectus.
LENDING ON INCOME-PRODUCING REAL PROPERTIES ENTAILS ENVIRONMENTAL
RISKS. The issuer or the trust estate could become liable for a material adverse
environmental condition at one of the underlying real properties securing the
pledged mortgage loans in the trust. Any potential environmental liability could
reduce or delay payments on the offered bonds.
A third-party consultant conducted an environmental site assessment, or
updated a previously conducted assessment, with respect to ________ of the
underlying real properties for the pledged mortgage loan, during the _____-month
period ending on ______________. Each of those environmental site assessments or
updates, as the case may be, complied with industry-wide standards. Not all of
those environmental site assessments, however, satisfied all the requirements
necessary to be considered a Phase I environmental site assessment. In
__________ cases, a third-party consultant also conducted a Phase II
environmental site assessment of the underlying real property. If any assessment
or update revealed a material adverse environmental condition or circumstance at
any underlying real property and the consultant recommended action, then,
depending on the nature of the condition or circumstance, the borrower has--
- implemented or agreed to implement an operations and maintenance plan,
in the manner and within the time frames specified in the related loan
documents;
- agreed to monitor periodically nearby properties, in the manner and
within the time frames specified in the related loan documents; or
- established a reserve account with the lender to cover the estimated
cost of addressing the condition or circumstances.
In many cases, the identified condition related to the presence of
asbestos-containing materials, lead-based paint and/or radon. Where these
substances were present, the environmental consultant generally recommended, and
the related loan documents required, the establishment of an operation and
maintenance plan to address the issue or, in the case of asbestos-containing
materials and lead-based paint, an abatement or removal program. In _________
cases, the particular asbestos-containing materials or lead-based paint was in
poor condition. This could result in a claim for damages by any party injured by
that condition.
In ________ cases, the cost to remediate, prevent or otherwise deal
with an adverse environmental condition at an underlying real property securing
a pledged mortgage loan to be included in the trust estate, was estimated to be
more than $_____________.
[In _______ cases, the environmental consultant did not recommend that
any action be taken with respect to a potential adverse environmental condition
at an underlying real property securing a pledged mortgage loan to be included
in the trust estate, because a responsible party with respect to that condition
had already been identified.]
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<PAGE>
[In the case of ________ of the underlying real properties, securing
____% of the initial mortgage collateral balance, either--
- no environmental site assessment was conducted in connection with the
origination of the related pledged mortgage loan, or
- a Phase II environmental site assessment was recommended but not
performed.]
See "Risk Factors--Environmental Liabilities Will Adversely Affect the
Value and Operation of the Contaminated Property and May Deter a Lender from
Foreclosing" and "Legal Aspects of Mortgage Loans--Environmental Considerations"
in the accompanying prospectus.
LENDING ON INCOME-PRODUCING PROPERTIES ENTAILS RISKS RELATED TO
PROPERTY CONDITION. Licensed engineers inspected ________ of the underlying real
properties of the pledged mortgage loans to be included in the trust estate
during the _____-month period preceding the cut-off date, to assess-
- the structure, exterior walls, roofing, interior construction,
mechanical and electrical systems, and
- the general condition of the site, buildings and other improvements
located at each underlying real property.
At ___________ of those properties, the inspections identified
conditions requiring escrows to be established for repairs or replacements
estimated to cost in excess of $________. In ________ of these cases, the
originator required the related borrower to fund reserves, or deliver letters of
credit or other instruments, to cover these costs.
LIMITATIONS ON ENFORCEABILITY OF CROSS-COLLATERALIZATION. The mortgage
collateral will include ________ mortgage loans that are secured, including
through cross-collateralization with other mortgage loans, by multiple
underlying real properties. These mortgage loans are identified in the tables
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<PAGE>
contained in Annex A-1. The purpose of securing any particular mortgage loan or
group of cross-collateralized mortgage loans with multiple real properties is to
reduce the risk of default or ultimate loss as a result of an inability of any
particular property to generate sufficient net operating income to pay debt
service. [However, ________ of these mortgage loans permit--
- the release of one or more of the underlying real properties from the
related mortgage lien, and/or
- a full or partial termination of the applicable
cross-collateralization, in each case, upon the satisfaction of the
conditions described under "Description of the Mortgage
Collateral--Terms and Conditions of the Pledged Mortgage Loans" in
this prospectus supplement.]
In addition, when multiple real properties secure a mortgage loan or
group of cross-collateralized mortgage loans, the amount of the mortgage
encumbering any particular one of those properties may be less than the full
amount of the related mortgage loan or group of cross-collateralized mortgage
loans, generally to avoid recording tax. This mortgage amount may equal the
appraised value or allocated loan amount for the underlying real property and
will limit the extent to which proceeds from the property will be available to
offset declines in value of the other properties securing the same mortgage loan
or group of cross-collateralized mortgage loans.
________ pledged mortgage loans included in the trust estate are, in
each case, secured by real properties located in two or more states. These
mortgage loans represent ____% of the initial mortgage collateral balance.
Foreclosure actions are brought in state court and the courts of one state
cannot exercise jurisdiction over property in another state. Upon a default
under any of these mortgage loans, it may not be possible to foreclose on the
related underlying real properties simultaneously.
LIMITED INFORMATION CAUSES UNCERTAINTY. ___________ of the pledged
mortgage loans included in the trust estate are acquisition financing.
Accordingly, limited or no operating information is available with respect to
the underlying real properties for those mortgage loans. As a result, you may
find it difficult to analyze the performance of those properties.
[PRIOR BANKRUPTCIES. We are aware that, in the case of ________ pledged
mortgage loans included in the trust estate--
- the related borrower or a principal in the related borrower has been a
party to, or
- the related underlying real property has been the subject of, prior
bankruptcy proceedings.]
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CAPITALIZED TERMS USED IN THIS PROSPECTUS SUPPLEMENT
From time to time we use capitalized terms in this prospectus
supplement. Each of those capitalized terms will have the meaning assigned to
it in the "Glossary" attached to this prospectus supplement.
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus includes the
words "expects", "intends", "anticipates", "estimates" and similar words and
expressions. These words and expressions are intended to identify forward-
looking statements. Any forward-looking statements are made subject to risks and
uncertainties which could cause actual results to differ materially from those
stated. These risks and uncertainties include, among other things, declines in
general economic and business conditions, increased competition, changes in
demographics, changes in political and social conditions, regulatory initiatives
and changes in customer preferences, many of which are beyond our control and
the control of any other person or entity related to this offering. The
forward-looking statements made in this prospectus supplement are accurate as of
the date stated on the cover of this prospectus supplement. We have no
obligation to update or revise any forward-looking statement.
DESCRIPTION OF THE MORTGAGE COLLATERAL
GENERAL
The mortgage collateral to be included in the trust estate will consist
of the _________ mortgage loans identified on Annex A-1 to this prospectus
supplement. The mortgage collateral consisting of those loans will have an
initial mortgage collateral balance of $___________. However, the actual initial
mortgage collateral balance may be as much as ______% smaller or larger than
that amount if any of those pledged mortgage loans are removed from the mortgage
collateral or any other mortgage loans or other assets are added to the mortgage
collateral. See "Changes in Mortgage Collateral Characteristics" below.
The initial mortgage collateral balance will equal the total cut-off
date principal balance of the mortgage loans to be included in the trust estate.
The cut-off date principal balance of any mortgage loan is equal to its unpaid
principal balance as of the cut-off date, after application of all monthly debt
service payments due with respect to the mortgage loan on or before that date,
whether or not those payments were received. The cut-off date principal balances
of each mortgage loan that is to be included in the trust estate is shown on
Annex A-1 to this prospectus supplement. Those cut-off date principal balances
range from $_______ to $__________, and the average of those cut-off date
principal balance is $_________.
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Each of the mortgage loans to be included in the trust estate is an
obligation of the related borrower to repay a specified sum with interest. Each
of those mortgage loans is evidenced by a promissory note and secured by a
mortgage, deed of trust or other similar security instrument that creates a
mortgage lien on the ownership and/or leasehold interest of the related borrower
or another party in one or more commercial or multifamily real properties. The
mortgage lien will, in all cases, be a first priority lien, subject only to
Permitted Encumbrances.
You should consider each of the pledged mortgage loans to be a
nonrecourse obligation of the related borrower. In the event of a payment
default by the related borrower, recourse will be limited to the corresponding
underlying real property or properties for satisfaction of that borrower's
obligations. In those cases where recourse to a borrower or guarantor is
permitted under the related mortgage loan documents, we have not undertaken an
evaluation of the financial condition of any of these persons. None of the
pledged mortgage loans will be insured or guaranteed by any governmental entity
or by any other person.
We provide in this prospectus supplement a variety of information
regarding the pledged mortgage loans to be included in the trust estate. When
reviewing this information, please note that --
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<PAGE>
- All numerical information provided with respect to the mortgage loans
is provided on an approximate basis.
- All weighted average information provided with respect to the mortgage
loans reflects a weighting by their respective cut-off date principal
balances.
- When information with respect to the underlying real properties is
expressed as a percentage of the initial mortgage collateral balance,
the percentages are based upon the cut-off date principal balances of
the related mortgage loans.
- If a mortgage loan is secured by multiple underlying real properties
located in more than one state, a portion of that mortgage loan has
been allocated to each of those properties.
- Statistical information regarding the pledged mortgage loans may
change prior to the date of initial issuance of the offered bonds due
to changes in the composition of the mortgage collateral prior to that
date.
CROSS-COLLATERALIZED MORTGAGE LOANS, MULTI-PROPERTY MORTGAGE LOANS AND MORTGAGE
LOANS WITH AFFILIATED BORROWERS
The mortgage collateral will include ________ mortgage loans that are,
in each case, individually or through cross-collateralization with other
mortgage loans, secured by two or more real properties. [However, the amount of
the mortgage lien encumbering any particular one of those properties may be less
than the full amount of the related mortgage loan or group of
cross-collateralized mortgage loans, generally to avoid recording tax. The
mortgage amount may equal the appraised value or allocated loan amount for the
particular real property. This would limit the extent to which proceeds from
that property would be available to offset declines in value of the other
underlying real properties securing the same mortgage loan or group of
cross-collateralized mortgage loans.]
________ of the mortgage loans referred to in the prior paragraph
entitle the related borrower(s) to obtain a release of one or more of the
corresponding underlying real properties and/or a termination of any applicable
cross-collateralization, subject, in each case, to the fulfillment of one or
more of the following conditions--
- the pay down of the mortgage loan(s) in an amount equal to a specified
percentage, which is usually ____%, of the portion of the total loan
amount allocated to the property or properties to be released;
- the satisfaction of debt service coverage and loan-to-value tests for
the property or properties that will remain as collateral; and/or
- receipt by the lender of confirmation from each applicable rating
agency that the action will not result in a qualification, downgrade
or withdrawal of any of the then-current ratings of the offered bonds.
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In addition, _________ of the mortgage loans referred to in the prior paragraph
also entitle the related borrower to a release of one or more of the
corresponding underlying real properties through defeasance. See "--Terms and
Conditions of the Pledged Mortgage Loans--Defeasance Loans" below.
The table below identifies each group of underlying real properties
that secure an individual multi-property mortgage loan or a group of
cross-collateralized mortgage loans that will, in each case, represent at least
____% of the initial mortgage collateral balance.
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL
STATES WHERE MORTGAGE
THE PROPERTIES COLLATERAL
PROPERTY NAMES ARE LOCATED BALANCE
-------------- -------------- ----------
<S> <C> <C>
</TABLE>
The table below shows each group of underlying real properties that:
- are owned by the same or affiliated borrowers; and
- secure two or more non-cross-collateralized mortgage loans that,
represent at least ____% of the initial mortgage collateral balance.
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL
STATES WHERE MORTGAGE
THE PROPERTIES COLLATERAL
PROPERTY NAMES ARE LOCATED BALANCE
-------------- -------------- ----------
<S> <C> <C>
</TABLE>
S-52
<PAGE>
TERMS AND CONDITIONS OF THE PLEDGED MORTGAGE LOANS
DUE DATES. All of the pledged mortgage loans provide to be included in
the trust estate for monthly debt service payments to be due on the ______ day
of each month.
MORTGAGE RATES; CALCULATIONS OF INTEREST. In general, each of the
pledged mortgage loans to be included in the trust estate bears interest at a
mortgage interest rate that, in the absence of default, is fixed until maturity.
However, as described under "--ARD Loans" below, each of those mortgage loans
that has an anticipated repayment date will accrue interest after that date
at a rate that is in excess of its mortgage interest rate prior to that date.
[IF ANY OF THE MORTGAGE LOANS HAVE FLOATING OR ADJUSTABLE MORTGAGE INTEREST
RATES, DISCUSS CALCULATION OF THOSE RATES, INCLUDING INDICES, GROSS MARGINS,
ADJUSTMENT DATES, FLOORS AND CAPS.]
The mortgage interest rate for each of the pledged mortgage loans that
is to be included in the trust estate is shown on Annex A-1 to this prospectus
supplement. As of the cut-off date, those mortgage interest rates ranged from
____% per annum to ____% per annum, and the weighted average of those mortgage
interest rates was ____% per annum.
Except in the case of pledged mortgage loans with anticipated repayment
dates, none of the mortgage loans to be included in the trust estate provides
for negative amortization for the deferral of interest. [DESCRIBE ANY POTENTIAL
NEGATIVE AMORTIZATION.]
Each of the pledged mortgage loans will accrue interest on the basis of
one of the following conventions:
- the actual number of days elapsed during each one-month accrual period
in a year of 360 days; or
- a 360-day year consisting of twelve 30-day months; or
- [SPECIFY ANY OTHER BASIS].
The table below shows the number of, and percentage of initial mortgage
collateral balance represented by, mortgage loans that accrue interest based on
each of the foregoing conventions.
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL MORTGAGE
INTEREST ACCRUAL BASIS MORTGAGE LOANS COLLATERAL BALANCE
---------------------- -------------- ------------------
<S> <C> <C>
Actual/360 Basis %
30/360 Basis %
[Other] %
</TABLE>
BALLOON LOANS. ________ of the pledged mortgage loans to be included in
the trust estate, representing ____% of the initial mortgage collateral balance,
are
S-53
<PAGE>
characterized by--
- an amortization schedule that is significantly longer than the actual
term of the mortgage loan, and
- a substantial payment being due with respect to the mortgage loan on
its stated maturity date.
ARD LOANS. ________ of the pledged mortgage loans to be included in the
trust estate, representing ____% of the initial mortgage collateral balance, are
characterized by the following features:
- A maturity date that is more than ______ years following origination.
- The designation of an anticipated repayment date that is generally
______ years following origination. The anticipated repayment date for
each of the ARD Loans is listed on Annex A-1 to this prospectus
supplement.
- The ability of the related borrower to prepay the mortgage loan,
without restriction, including without any obligation to pay a
prepayment premium or a yield maintenance charge, at any time on or
after a date that is generally ______ to ______ months prior to the
related anticipated repayment date.
- Until its anticipated repayment date, the calculation of interest at
its initial mortgage interest rate.
- From and after its anticipated repayment date, the accrual of interest
at a revised annual rate that is, in most cases, equal to the sum of-
(1) its initial mortgage interest rate, plus
(2) a specified margin that is, in _______ cases, not more than
______ percentage points.
- The deferral of any additional interest accrued with respect to the
mortgage loan from and after the related anticipated repayment date at
the difference between its revised mortgage interest rate and its
initial mortgage interest rate. This post-anticipated repayment date
additional interest may, in some cases, compound at the new revised
mortgage interest rate. Any post-anticipated repayment date additional
interest accrued with respect to the mortgage loan following its
anticipated repayment date will not be payable until the entire
principal balance of the mortgage loan has been paid in full.
- From and after its anticipated repayment date, the accelerated
amortization of the mortgage loan out of any and all monthly cash flow
from the corresponding underlying real property which remains after
payment of the applicable monthly debt service payments and permitted
operating expenses and capital expenditures. These accelerated
amortization payments and the post-anticipated repayment date
additional
S-54
<PAGE>
interest are considered separate from the monthly debt service
payments due with respect to the mortgage loan.
In the case of each of the ARD Loans to be included in the trust
estate, the related borrower has agreed to enter into a cash management
agreement not less than ______ months prior to the related anticipated repayment
date if it has not already done so. The related borrower or the manager of the
corresponding underlying real property will be required under the terms of that
cash management agreement to deposit or cause the deposit of all revenue from
that property received after the related anticipated repayment date into a
designated account controlled by the lender under the ARD Loan.
FULLY AMORTIZING LOANS. ________ of the mortgage loans to be included
in the trust estate, representing ____% of the initial mortgage collateral
balance, are characterized by--
- constant monthly debt service payments throughout the substantial term
of the mortgage loan, and
- an amortization schedule that is approximately equal to the actual
term of the mortgage loan.
However, none of these fully amortizing loans has either--
- an anticipated repayment date, or
- the associated repayment incentives.
S-55
<PAGE>
AMORTIZATION OF PRINCIPAL. The table below shows, in months, the
original and, as of ____________ the cut-off date the remaining amortization
schedules and terms to maturity for the mortgage loans that we expect to back
the offered bonds or the specified sub-groups of those mortgage loans backing
the series ______ bonds. For purposes of the following table, the ARD Loans are
assumed to mature on their respective anticipated repayment dates.
<TABLE>
<CAPTION>
FULLY AMORTIZING ALL
BALLOON LOANS ARD LOANS LOANS MORTGAGE LOANS
------------- --------- ----- --------------
<S> <C> <C> <C> <C>
Original Term to Maturity (mos.)
Maximum
Minimum
Weighted Average
Remaining Term to Maturity (mos.)
Maximum
Minimum
Weighted Average
Original Amortization Term (mos.)
Maximum
Minimum
Weighted Average
Remaining Amortization Term (mos.)
Maximum
Minimum
Weighted Average
</TABLE>
Some of the pledged mortgage loans will, in each case, provide for a
recast of the amortization schedule and an adjustment of the monthly debt
service payments on the mortgage loan upon application of specified amounts of
condemnation proceeds or insurance proceeds to pay the related unpaid principal
balance.
[DISCUSS ANY ADJUSTMENTS TO THE MONTHLY DEBT SERVICE PAYMENTS FOR THE
MORTGAGE LOANS.]
VOLUNTARY PREPAYMENT PROVISIONS. In general, at origination, the pledge
mortgage loans to be included in the trust estate, provided for:
- a prepayment lock-out period, during which voluntary principal
prepayments are prohibited, followed by
- a prepayment consideration period, during which voluntary
prepayments are permitted, subject to the payment of an
additional consideration for the prepayment, followed by
- an open prepayment period, during which voluntary principal
prepayments may be made without any prepayment consideration.
S-56
<PAGE>
Notwithstanding otherwise applicable lock-out periods, partial
prepayments of some of the pledged mortgage loans will be required under the
circumstances described under "--Terms and Conditions of the Pledged Mortgage
Loans--Other Prepayment Provisions" below.
The prepayment terms of each of the pledged mortgage loans to be
included in the trust estate are more particularly described in Annex A-1 to
this prospectus supplement.
As described below under "--Defeasance Loans", [substantially all] of
the pledged mortgage loans will permit the related borrower to obtain a full or
partial release of the corresponding underlying real property from the related
mortgage lien by delivering U.S. government securities as substitute collateral.
None of these mortgage loans will permit defeasance prior to the ______
anniversary of the date of initial issuance of the offered bonds.
PREPAYMENT LOCK-OUT PERIODS. ________ of the mortgage loans to be
included in the trust estate, representing ____% of the initial mortgage
collateral balance, backing the series "______" bonds provide for prepayment
lock-out periods as of the cut-off date, and--
- the maximum remaining prepayment lock-out period of those
mortgage loans as of that date is ____ months,
- the minimum remaining prepayment lock-out period of those
mortgage loans as of that date is ____ months, and
- the weighted average remaining prepayment lock-out period of
those mortgage loans as of that date is ____ months.
Notwithstanding otherwise applicable lock-out periods, partial
prepayments of some of the pledged mortgage loans will be required under the
circumstances described under "--Terms and Conditions of the Pledged Mortgage
Loans--Other Prepayment Provisions" below.
PREPAYMENT CONSIDERATION. Following an initial prepayment lock-out
period, ________ of the mortgage loans to be included in the trust estate,
representing ____% of the initial mortgage collateral balance, provide for the
payment of prepayment consideration in connection with a voluntary prepayment
during part of the loan term. That prepayment consideration will equal [SPECIFY
CALCULATION OF PREPAYMENT CONSIDERATION].
Prepayment premiums and yield maintenance charges received on the
pledged mortgage loans, whether in connection with voluntary or involuntary
prepayments, will be allocated and paid to the persons, in the amounts and in
accordance with the priorities described under "Description of the Offered
Bonds--Payments--Payments of Prepayment Premiums and Yield Maintenance Charges"
in this prospectus supplement. Limitations may exist under applicable state law
on the enforceability of the provisions of the pledged mortgage loans that
require payment of prepayment premiums or yield maintenance charges. Neither we
nor the underwriter makes any representation or warranty as to the
collectability of any prepayment premium or yield maintenance charge with
respect to any of the mortgage loans included in the trust estate. See "Risk
Factors--Some Provisions in
S-57
<PAGE>
the Mortgage Loans Underlying Your Offered Bonds May be Challenged as Being
Unenforceable--Prepayment Premiums, Fees and Charges" and "Legal Aspects of
Mortgage Loans--Default Interest and Limitations on Prepayments" in the
accompanying prospectus.
OPEN PREPAYMENT PERIODS. __________ of the mortgage loans to be
included in the trust estate, representing ____% of the initial mortgage
collateral balance, provide for an open prepayment period. That the open
prepayment period generally begins ______ to ______ months prior to stated
maturity [or, in the case of an ARD Loan, prior to the related anticipated
repayment date.]
OTHER PREPAYMENT PROVISIONS. ___________ of the mortgage loans provide
to be included in the trust estate for mandatory partial prepayments,
notwithstanding any lock-out period that may otherwise be in effect. In
__________ of these cases, the related borrower has established reserves or
delivered a letter of credit that will be applied to a partial prepayment of the
mortgage loan if one or more property performance conditions do not occur.
Investors should not expect any prepayment consideration to be paid in
connection with any mandatory partial prepayment described in the prior
paragraph.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS. ________ of the
mortgage loans to be included in the trust estate, representing ____% of the
initial mortgage collateral balance, contain both a due-on-sale clause and a
due-on-encumbrance clause. In general, except for the permitted transfers
discussed in the next paragraph, these clauses either-
- permit the holder of the related mortgage to accelerate the
maturity of the mortgage loan if the borrower sells or otherwise
transfers or encumbers the corresponding underlying real
property, or
- prohibit the borrower from doing so without the consent of the
holder of the mortgage.
See, however, "Risk Factors--The Investment Performance of Your Offered Bonds
Will Depend upon Payments, Defaults and Losses on the Related Mortgage Loans;
and Those Payments, Defaults and Losses may be Highly
Unpredictable--Delinquencies, Defaults and Losses on the Securing Mortgage
Loans May Affect the Amount and Timing of Payments on Your Offered Bonds; and
the Rate and Timing of Those Delinquencies and Defaults, and the Severity of
Those Losses, are Highly Unpredictable" and "--Some Provisions in the
Mortgage Loans Underlying Your Offered Bonds may be Challenged as Being
Unenforceable--Due-on-Sale and Debt Acceleration Clauses" and "Legal Aspects
of Mortgage Loans--Due on Sale and Due-on-Encumbrance Provisions" in the
accompanying prospectus.
_______ of the mortgage loans to be included in the trust estate permit
one or more of the following types of transfers:
S-58
<PAGE>
- transfers of the corresponding underlying real property if
specified conditions are satisfied, which conditions normally
include--
1. confirmation by each applicable rating agency that the
transfer will not result in a qualification, downgrade or
withdrawal of any of its then current ratings of the bonds,
or
2. the reasonable acceptability of the transferee to the
lender;
- a transfer of the corresponding underlying real property to a
person that is affiliated with or otherwise related to the
borrower;
- transfers by the borrower of the corresponding underlying real
property to specified entities or types of entities; or
- a transfer of non-controlling ownership interests in the related
borrower.
DEFEASANCE LOANS. ________ of the mortgage loans to be included in the
trust estate, representing ____% of the initial mortgage collateral balance,
permit the borrower to deliver U.S. government securities as substitute
collateral.
Each of these mortgage loans permits the related borrower, during
specified periods and subject to conditions specified in the mortgage loan
documents, to pledge to the holder of the mortgage loan the requisite amount of
direct, non-callable U.S. government securities and obtain a full or partial
release of the underlying real property. In general, the U.S. government
securities to be delivered in connection with the defeasance of any mortgage
loan, must provide for a series of payments that--
- will be made prior, but as closely as possible, to all successive
due dates through and including the maturity date, and
- will, in the case of each due date, be in a total amount equal to
or greater than the monthly debt service payment, including any
applicable balloon payment, scheduled to be due on that date,
with any excess to be returned to the related borrower.
[For purposes of determining the defeasance collateral for an ARD Loan,
however, that mortgage loan will be treated as if a balloon payment is due on
its anticipated repayment date.]
If fewer than all of the real properties securing any particular
mortgage loan or group of cross-collateralized mortgage loans are to be released
in connection with any defeasance, the requisite defeasance collateral will be
calculated based on the allocated loan amount for the properties to be released
and the portion of the monthly debt service payments attributable to that
allocated loan amount.
S-59
<PAGE>
In connection with any delivery of defeasance collateral, the related
borrower will be required to deliver a security agreement granting the bond
trustee, for the benefit of the bondholders and the issuer, a first priority
security interest in the defeasance collateral, together with an opinion of
counsel confirming the first priority status of the security interest.
None of the mortgage loans to be included in the trust estate may be
defeased prior to the ______ anniversary of the date of initial issuance of the
series ______ bonds.
MORTGAGE COLLATERAL CHARACTERISTICS
GENERAL. A detailed presentation of various characteristics of the
pledged mortgage loans to be included in the trust estate and of the
corresponding underlying real properties, on an individual basis and in tabular
format, is shown on Annex A-1 and Annex A-2 to this prospectus supplement. Some
of the terms that appear in those exhibits, as well as elsewhere in this
prospectus supplement, are defined or otherwise discussed in the "Glossary" to
this prospectus supplement. The statistics in the tables and schedules on Annex
A-1 and Annex A-2 to this prospectus supplement were derived, in many cases,
from information and operating statements furnished by or on behalf of the
respective borrowers. The information and the operating statements were
generally unaudited and have not been independently verified by us or the
underwriter.
S-60
<PAGE>
SIGNIFICANT PLEDGED MORTGAGE LOANS
[Insert Description of Significant Pledged Mortgage Loans]
ADDITIONAL LOAN AND PROPERTY INFORMATION
DELINQUENCIES. None of the mortgage loans to be included in the trust
estate was as of cut-off date, or has been at any time during the ______-month
period preceding that date, ______ days or more delinquent with respect to any
monthly debt service payment.
TENANT MATTERS. Described and listed below are special considerations
regarding tenants at the underlying real properties for the pledged mortgage
loans to be included in trust estate--
- [________ of the underlying real properties, securing ____% of
the initial mortgage collateral balance, are, in each case, a
[SPECIFY PROPERTY TYPES] that is leased to one or more major
tenants that each occupy at least ____% of the net rentable area
of the particular property.
- A number of companies are major tenants at more than one of the
underlying real properties.
- There are ________ cases in which a particular entity is a tenant
at more than one of the underlying real properties, and although
it may not be a major tenant at any of those properties, it is
significant to the success of the properties.
- ________ of the underlying real properties, securing ____% of the
initial mortgage collateral balance, are multifamily rental
properties that have material concentrations of student tenants.]
[GROUND LEASES. ________ of the pledged mortgage loans to be included
in the trust estate, representing ____% of the initial mortgage collateral
balance, are secured, in whole or in material part, by a mortgage lien on the
borrower's leasehold interest in the corresponding underlying real property. In
each case, the related ground lease, giving effect to all extension options,
expires more than ten years after the stated maturity of the related mortgage
loan and either:
- the ground lessor has subordinated its interest in the underlying
real property to the interest of the holder of that mortgage
loan; or
- the ground lessor has agreed to give the holder of that mortgage
loan notice of, and the right to cure, any default or breach by
the lessee.]
[SPECIFY ANY EXCEPTIONS.]
S-61
<PAGE>
See "Risk Factors--Ground Leases Create Risks for Lenders That are not
Present When Lending on an Actual Ownership Interest in a Real Property" and
"Legal Aspects of Mortgage Loans--Foreclosure--Leasehold Considerations" in
the accompanying prospectus.
[ADDITIONAL AND OTHER FINANCING. We are aware of ________ underlying
real properties, securing ____% of the initial mortgage collateral balance, that
are encumbered by secured subordinate debt that is not part of the mortgage
collateral. The following table identifies those properties, indicates the
initial principal amount of the secured subordinate debt and sets forth the
cut-off date principal balances of the related mortgage loans. [In the case of
each of those properties, the subordinate lender has entered into a
subordination and standstill agreement with the holder of the related mortgage
loan whereby that subordinate lender--
- expressly subordinated its right to receive collections and
proceeds from, and otherwise deal with, that property, and
- agrees not to take any enforcement or other legal action against
that property or the related borrower as long as the
corresponding pledged mortgage loan is outstanding and the
special servicer has not taken any similar enforcement or other
legal action.]
<TABLE>
<CAPTION>
% OF INITIAL
CUT-OFF DATE MORTGAGE COLLATERAL
PRINCIPAL BALANCE BALANCE REPRESENTED INITIAL PRINCIPAL
OF RELATED BY RELATED AMOUNT OF SECURED
PROPERTY NAMES MORTGAGE LOANS MORTGAGE LOANS SUBORDINATE DEBT
-------------- -------------- -------------- ----------------
<S> <C> <C> <C>
</TABLE>
[In addition, we are aware that the borrowers under ________ of the
pledged mortgage loans to be included in the trust estate, representing ____% of
the initial mortgage collateral balance, have unsecured debt. In _____ of those
cases, the lender on the debt is an affiliate of the borrower. In ______ of
those cases, the lender on the unsecured debt has executed and delivered a
subordination and standstill agreement in favor of the senior lender under the
corresponding pledged mortgage loan. In addition, some of the pledged mortgage
loans will permit the related borrower to incur unsecured subordinated debt in
the future, subject to conditions such as--
- limiting the use of proceeds to refurbishing or renovating the
underlying real property, and/or
- acquiring furniture, fixtures and equipment for the underlying
real property.
S-62
<PAGE>
Borrowers that do not meet special purpose entity, bankruptcy-remote criteria,
generally do not have any restriction on the incurrence of unsecured debt.
Additional debt, in any form, may cause a diversion of funds from property
maintenance and increase the likelihood that the borrower will become the
subject of a bankruptcy proceeding.] See "Risk Factors--Subordinate Debt
Increases the Likelihood that a Borrower Will Default on a Mortgage Loan Backing
Your Offered Bonds" and "Legal Aspects of Mortgage Loans--Subordinate
Financing" in the accompanying prospectus.
Except as disclosed under this "--Additional and Other Financing"
subsection, we have not been able to confirm whether the respective borrowers
under the pledged mortgage loans to be included in the trust estate have any
other debt outstanding.
ZONING AND BUILDING CODE COMPLIANCE. In connection with the origination
of each pledged mortgage loan to be included in the trust estate, the related
originator examined whether the use and operation of the underlying real
property were in material compliance with zoning, land-use, building, fire and
health ordinances, rules, regulations and orders then-applicable to that
property. Evidence of this compliance may have been in the form of legal
opinions, certifications from government officials, title insurance
endorsements, engineering or consulting reports and/or representations by the
related borrower. In ________ cases, a certificate of occupancy was not
available. Where the property as currently operated is a permitted nonconforming
use and/or structure, an analysis was generally conducted as to--
- the likelihood that a material casualty would occur that would
prevent the property from being rebuilt in its current form, and
- whether existing replacement cost hazard insurance or, if
necessary, supplemental law or ordinance coverage would, in the
event of a material casualty, be sufficient--
1. to satisfy the entire mortgage loan, or
2. taking into account the cost of repair, to pay down the
mortgage loan to a level that the remaining collateral would
be adequate security for the remaining loan amount.]
HAZARD, LIABILITY AND OTHER INSURANCE. [Although exceptions exist, the
loan documents for each of the pledged mortgage loans to be included in the
trust estate generally require the related borrower to maintain with respect to
the corresponding underlying real properties the following insurance coverage--
- hazard insurance in an amount that is subject to a customary
deductible, at least equal to the lesser of--
1. the outstanding principal balance of the related mortgage
loan, and
2. the full insurable replacement cost of the improvements
located on the insured property;
S-63
<PAGE>
- if any portion of the property was in an area identified in the
federal register by the Flood Emergency Management Agency as
having special flood hazards, flood insurance meeting the
requirements of the Federal Insurance Administration guidelines,
in an amount that is equal to the least of--
1. the outstanding principal balance of the related mortgage
loan;
2. the full insurable value of the insured property, and
3. the maximum amount of insurance available under the National
Flood Insurance Act of 1968;
- comprehensive general liability insurance against claims for
personal and bodily injury, death or property damage occurring
on, in or about the insured property, in an amount at least equal
to $___________ per occurrence; and
- business interruption or rent loss insurance either in an amount
not less than 100% of the projected rental income or revenue from
the insured property for at least ____ months or, alternatively,
in a specified dollar amount.]
[In general, the underlying real properties for the pledged mortgage
loans included in the trust estate, including those properties located in
California, are not insured against earthquake risks. In the case of those
properties located in California other than those that are manufactured housing
communities or self storage facilities, a third party consultant conducted
seismic studies to assess the probable maximum loss for the property. In
general, when the resulting reports concluded that an underlying real property
was likely to experience a probable maximum loss in excess of ____% of the
estimated replacement cost of the improvements, the related originator required
the borrower to--
- obtain earthquake insurance, or
- establish reserves to cover the estimated costs of completing
seismic retrofitting recommended by the consultant,
unless, in any of those cases, the original loan-to-value ratio was relatively
low.]
[With respect to each of the underlying real properties for the pledged
mortgage loans, the master servicer is required to cause the maintenance of all
insurance coverage as is required under the related mortgage to the extent--
- the bond trustee, on behalf of the bondholders and the issuer,
has an insurable interest, and
S-64
<PAGE>
- the master servicer can require maintenance of insurance under
applicable law.]
[Where insurance coverage at the underlying real property for any
pledged mortgage loan is left to the lender's discretion, the master servicer
will be required to use reasonable efforts to cause the related borrower to
maintain insurance generally in the amounts, type and scopes of coverage
required under the other pledged mortgage loans.]
[Various forms of insurance maintained with respect to any of the
underlying real properties for the pledged mortgage loans, including casualty
insurance, environmental insurance and earthquake insurance, may be provided
under a blanket insurance policy. That blanket insurance policy will also cover
the other real properties some of which may not secure loans included, the trust
estate. As a result of total limits under any of those blanket policies, losses
at other properties covered by the blanket insurance policy may reduce the
amount of insurance coverage with respect to a property securing one of the
loans included the trust estate. See "Risk Factors--Lack of Insurance Coverage
Exposes a Lender to Risk for Particular Special Hazard Losses" in the
accompanying prospectus.]
[With limited exception, the pledged mortgage loans to be included in
the trust estate generally provide that insurance and condemnation proceeds are
to be applied either--
- to restore the underlying real property; or
- towards payment of the related mortgage loan.]
[If any underlying real property is acquired as part of the trust
estate through foreclosure, deed in lieu of foreclosure or otherwise following a
default on the related mortgage loan, the special servicer will be required to
maintain for that property generally the same types of insurance policies
providing coverage in the same amounts as were previously required under the
mortgage that had covered the property.]
[The master servicer and the special servicer may each satisfy its
obligations regarding maintenance of the hazard insurance policies referred to
in this prospectus supplement by maintaining a blanket insurance policy insuring
against hazard losses on all of the pledged mortgage loans for which it is
responsible. If any blanket insurance policy maintained by the master services
or special services contains a deductible clause, however, the master servicer
or the special servicer, as the case may be, will be required, in the event of a
casualty covered by that policy, to pay out of its own funds all sums that--
- are not paid because of the deductible clause, and
- would have been paid if an individual hazard insurance policy
referred to above had been in place.]
[The applicable originator and its successors and assigns are the
beneficiaries under separate title insurance policies with respect to each
pledged mortgage loan. Each title insurer will enter into co-
S-65
<PAGE>
insurance and reinsurance arrangements with respect to the title insurance
policy as are customary in the title insurance industry. Subject to standard
exceptions, including those regarding claims made in the context of insolvency
proceedings, each title insurance policy will provide coverage to the bond
trustee for the benefit of the series ___________ bondholders and the issuer for
claims made against the bond trustee regarding the priority and validity of the
borrowers' title to the subject underlying real property.]
ASSESSMENTS OF PROPERTY CONDITION
PROPERTY INSPECTIONS. [_________ of the underlying real properties for
the pledged mortgage loans included in the trust estate were each inspected in
connection with the origination or acquisition of the related mortgage loan to
assess their general condition.] [DISCUSS RESULTS AND CORRESPONDING ACTIONS.]
APPRAISALS. [In connection with the origination of the pledged mortgage
loans, ________ of the underlying real properties were appraised by a state
certified appraiser or an appraiser belonging to the Appraisal Institute. Those
appraisals were conducted in accordance with the Uniform Standards of
Professional Appraisal Practices. In general, the appraisal for each of those
properties or a separate letter contains a statement by the appraiser stating
that the guidelines in Title XI of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 were followed in preparing the appraisal.] We have
not independently verified the accuracy of that statement with respect to any of
those properties. The primary purpose of each of those appraisals was to provide
an opinion of the fair market value of the related underlying real property.
There can be no assurance that another appraiser would have arrived at the same
opinion of value. The resulting appraised values are shown on Annex A-1 to this
prospectus supplement.
ENVIRONMENTAL ASSESSMENTS. [A Phase I environmental site assessment
was performed with respect to ________ of the underlying real properties for the
pledged mortgage loans included in the trust estate. Each of those environmental
site assessment was conducted in connection with the origination of the related
mortgage loan. In ________ cases, additional environmental testing, as
recommended by that Phase I assessment, was performed.] [DISCUSS RESULTS AND
CORRESPONDING ACTIONS.]
ENGINEERING ASSESSMENTS. [In connection with the origination of the
related pledged mortgage loans, a licensed engineer inspected ________ of the
underlying real properties to assess the structure, exterior walls, roofing,
interior structure and mechanical and electrical systems.] [DISCUSS RESULTS AND
CORRESPONDING ACTIONS.]
THE MORTGAGE LOAN SELLERS
We did not originate any of the mortgage loans that we intend to
include in the trust. We will acquire those mortgage loans from the following
entities:
- ______________________ -- _________ mortgage loans, representing
____% of the initial mortgage pool balance; and
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- ______________________ -- _________ mortgage loans, representing
____% of the initial mortgage pool balance.
[INSERT DESCRIPTION OF MORTGAGE LOAN SELLERS]
The information set forth in this prospectus supplement concerning each
of the mortgage loan sellers has been provided by the respective mortgage loan
sellers, and neither we nor the underwriter makes any representation or warranty
as to the accuracy or completeness of this information.
ASSIGNMENT OF THE MORTGAGE COLLATERAL
On or before the date of initial issuance of the offered bonds, the
following transfers of the mortgage collateral will occur. In each case, the
transferor will transfer or assign the subject mortgage collateral, without
recourse, to the transferee.
----------------------------------- -----------------------------------
[mortgage loan seller] [mortgage loan seller]
----------------------------------- -----------------------------------
Sale of _____ mortgage loans Sale of _____ mortgage loans
$_______ $_______
-------------------------------
Structured Asset
Securities Corporation
-------------------------------
Contribution of all mortgage loans
$__________
-------------------------------
LB Commercial
Mortgage Trust
-----------
-------------------------------
Pledge of all mortgage loans
$___________
-------------------------------
Bond Trustee
-------------------------------
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In connection with the foregoing transfers, we will be required to
deliver the following documents, among others, to the bond trustee with respect
to each of the pledged mortgage loans--
[SPECIFY SELECT DOCUMENTS.]
The bond trustee, either directly or through a custodian, is required
to hold all of the documents delivered to it with respect to the pledged
mortgage loans in trust for the benefit of the series _______ bondholders.
Within a specified period of time following that delivery, the trustee, directly
or through a custodian, will be further required to conduct a review of those
documents. The scope of the bond trustee's review of those documents will, in
general, be limited solely to confirming that they have been received. None of
the bond trustee, the master servicer, the special servicer or any custodian is
under any duty or obligation to inspect, review or examine any of the documents
relating to the pledged mortgage loans included in the trust estate to determine
whether the document is valid, effective, enforceable, in recordable form or
otherwise appropriate for the represented purpose.
If--
- any of the above-described documents required to be delivered by
us to the bond trustee is not delivered by us or is otherwise
defective, and
- that omission or defect materially and adversely affects the
value of, or the interests of the series _______ bondholders in
the subject loan,
then that omission or defect will be a material document defect as to which the
series ______ bondholders and the issuer will have the rights against us
described under "--Cures and Repurchases" below.
Within a specified period following the later of-
- the date on which the offered bonds are initially issued, and
- the date on which all recording information necessary to complete
the subject document is received by the bond trustee,
the bond trustee must submit for recording in the real property records of the
applicable jurisdiction each of the assignments of recorded loan documents in
its favor described above. Because most of the pledged mortgage loans to be
included in the trust estate are newly originated, many of those assignments
cannot be completed and recorded until the related mortgage and/or assignment of
leases and rents, reflecting the necessary recording information, is returned
from the applicable recording office.
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REPRESENTATIONS AND WARRANTIES
As of the date of initial issuance of the offered bonds, we will make,
with respect to each pledged mortgage loan that is included in the trust estate,
representations and warranties generally to the effect listed below, together
with any other representations and warranties as may be required by the rating
agencies.
The representations and warranties to be made by us with respect to
each pledged mortgage loan will include:
[SPECIFY SELECT REPRESENTATIONS AND WARRANTIES.]
If--
- there exists a breach of any of the above-described
representations and warranties made by us, and
- that breach materially and adversely affects the value of, or the
interests of the series ______ bondholders in, the subject
mortgage loan,
then that breach will be a material breach as to which the series _______
bondholders and the issuer will have the rights against us described under
"--Cures and Repurchases" below.
CURES AND REPURCHASES
If there exists, with respect to any pledged mortgage loan, a material
breach of any of the representations and warranties made by us, as discussed
under "--Representations and Warranties" above, or a material document defect
with respect to any pledged mortgage loan, as discussed under "--Assignment of
the Mortgage Collateral" above, then we will be required either:
- to remedy the material breach or the material document defect in
all material respects, or
- repurchase the affected mortgage loan at a price generally equal
to the sum of--
1. the unpaid principal balance of that mortgage loan at the
time of purchase, plus
2. all unpaid interest, Post-ARD Additional Interest and
Default Interest, due with respect to that mortgage loan
through the due date in the collection period of purchase,
plus
3. all unreimbursed advances to cover some of the costs and
expenses relating to the servicing and administration of
that mortgage loan.
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The time period within which we must complete that remedy or repurchase
will generally be limited to 90 days following the earlier of our discovery or
receipt of notice of the subject material breach or material document defect, as
the case may be. However, if we are diligently attempting to correct the
problem, we will be entitled to an additional 90 days to complete that remedy or
repurchase. Furthermore, if any material document defect arises solely out of
the failure of the applicable recording office to return a recorded mortgage
loan document, and if we are diligently attempting to retrieve that document,
then the time period may be extended for up to two years following the date of
initial issuance of the offered bonds.
Our cure/repurchase obligations described above will constitute the
sole remedy available to the series _______ bondholders and the issuer in
connection with a material breach of any of our representations or warranties or
a material document defect, with respect to any pledged mortgage loan in the
trust estate. No other person will be obligated to repurchase any affected
mortgage loan in connection with a material breach of any of the representations
and warranties or a material document defect, if we default on our obligation to
do so.
CHANGES IN MORTGAGE COLLATERAL CHARACTERISTICS
The description in this prospectus supplement of the mortgage
collateral is based upon the mortgage collateral as it is expected to be
constituted at the time the offered bonds are issued, with adjustments for the
monthly debt service payments due on the mortgage loans on or before the cut-off
date. Prior to the issuance of the offered bonds, one or more mortgage loans may
be removed from the trust estate if we consider the removal necessary or
appropriate. A limited number of other mortgage loans may be included in the
trust estate prior to the issuance of the offered bonds, unless including those
mortgage loans would materially alter the characteristics of the mortgage
collateral as described in this prospectus supplement. We believe that the
information in this prospectus supplement will be generally representative of
the characteristics of the mortgage collateral as it will be constituted at the
time the offered bonds are issued. However, the range of mortgage rates and
maturities, as well as the other characteristics of the pledged mortgage loans
described in this prospectus supplement, may vary, and the actual initial
mortgage collateral balance may be as much as ____% larger or smaller than the
initial mortgage collateral balance specified in this prospectus supplement.
A current report on Form 8-K will be available to purchasers of the
offered bonds on or shortly after the date of initial issuance of the offered
bonds. That current report on Form 8-K will be filed, together with the
governing documents, with the SEC within 15 days after the initial issuance of
the offered bonds. If pledged mortgage loans are removed from or added to the
trust estate, that removal or addition will be noted in that current report on
Form 8-K.
SERVICING OF THE PLEDGED MORTGAGE LOANS
GENERAL
The servicing of the pledged mortgage loans in the trust estate will be
governed by the servicing and administration agreement. The following summaries
describe some of the
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provisions of the servicing and administration agreement relating to the
servicing and administration of the pledged mortgage loans and any real estate
included in the trust estate. You should also refer to the accompanying
prospectus, in particular the section captioned "Description of the Governing
Documents" for additional important information regarding provisions of the
servicing and administration agreement that relate to the rights and obligations
of the master servicer and the special servicer. See "Description of the
Governing Documents--The Servicing and Administration Agreement(s)--Collection
and Other Servicing Procedures with Respect to Mortgage Loans" in the
accompanying prospectus.
The servicing and administration agreement provides that the master
servicer and the special servicer must each service and administer the pledged
mortgage loans and any real estate included in the trust estate for which it is
responsible, directly or through sub-servicers, in accordance with--
- any and all applicable laws, and
- the express terms of the servicing and administration agreement
and the respective mortgage loans.
Furthermore, to the extent consistent with the foregoing, the master servicer
and the special servicer must each service and administer the pledged mortgage
loans and any real estate included in the trust estate for which it is
responsible in accordance with the Servicing Standard.
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In general, the master servicer will be responsible for the servicing
and administration of--
- all pledged mortgage loans in the trust estate as to which no
Servicing Transfer Event has occurred, and
- all worked-out mortgage loans in the trust estate as to which no
new Servicing Transfer Event has occurred.
The special servicer, on the other hand, will be responsible for the
servicing and administration of each pledged mortgage loan in the trust estate
as to which a Servicing Transfer Event has occurred and which has not yet become
a worked-out mortgage loan with respect to that Servicing Transfer Event. The
special servicer will also be responsible for the administration of each
underlying real property that has been acquired as part of the trust estate with
respect to a defaulted mortgage loan through foreclosure, deed-in-lieu of
foreclosure or otherwise.
Despite the foregoing, the servicing and administration agreement will
require the master servicer to continue to collect information and prepare all
reports to the bond trustee required to be collected or prepared with respect to
any specially serviced assets and, otherwise, to render other incidental
services with respect to any specially serviced assets. Neither the master
servicer nor the special servicer will have responsibility for the performance
by the other of its respective obligations and duties under the servicing and
administration agreement.
The master servicer will transfer servicing of a pledged mortgage loan
to the special servicer, if it has not already done so, upon the occurrence of a
Servicing Transfer Event with respect to that mortgage loan. The special
servicer will return the servicing of that mortgage loan to the master servicer,
and that mortgage loan will be considered to have been worked-out, if and when
all Servicing Transfer Events with respect to that mortgage loan.
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THE INITIAL MASTER SERVICER AND THE INITIAL SPECIAL SERVICER
THE MASTER SERVICER.
[DESCRIBE THE INITIAL MASTER SERVICER.]
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The information set forth in this prospectus supplement concerning
___________ has been provided by it. Neither we nor the underwriter makes any
representation or warranty as to the accuracy or completeness of this
information.
THE SPECIAL SERVICER.
[DESCRIBE THE INITIAL SPECIAL SERVICER.]
The information set forth in this prospectus supplement concerning
___________ has been provided by it. Neither we nor the underwriter makes any
representation or warranty as to the accuracy of this information.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
THE MASTER SERVICING FEE. The principal compensation to be paid to the
master servicer with respect to its master servicing activities will be the
master servicing fee.
The master servicing fee:
- will be earned with respect to each and every mortgage loan,
including-
1. each specially serviced mortgage loan, if any, and
2. each mortgage loan, if any, as to which the corresponding
underlying real property has been acquired by the trust
through foreclosure or otherwise following a default; and
- in the case of each mortgage loan, will--
1. be calculated on a 30/360 basis,
2. accrue at the related master servicing fee rate,
3. accrue on the same principal amount as interest accrues or
is deemed to accrue from time to time with respect to that
mortgage loan, and
4. be payable monthly from amounts received with respect to
interest on that mortgage loan.
The master servicing fee will be ____% per annum.
ADDITIONAL MASTER SERVICING COMPENSATION. As additional master
servicing compensation, the master servicer will be entitled to receive--
- any Prepayment Interest Excesses collected with respect to all
mortgage loans securing the series
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______ bonds;
- any late payment charges and Default Interest, if any, that were
collected with respect to pledged mortgage loans included in the
trust estate, but only to the extent that those late payment
charges and Default Interest--
1. accrued with respect to the related mortgage loan while no
related Servicing Transfer Event exists, and
2. have not otherwise been applied to pay the master servicer,
the special servicer or the bond trustee, as applicable,
interest on advances made thereby with respect to the
related mortgage loan.
In addition, all modification fees, assumption fees, assumption
application fees, consent/waiver fees and other comparable transaction fees and
charges, if any, collected with respect to the pledged mortgage loans will be
allocated between the master servicer and the special servicer, as additional
compensation, or otherwise applied to cover related expenses, as provided in the
servicing and administration agreement.
The master servicer will be authorized to invest or direct the
investment of funds held in its custodial account, or in any and all accounts
maintained by it that are escrow and/or reserve accounts, in Permitted
Investments. See "-Custodial Account" below. The master servicer will be
entitled to retain any interest or other income earned on those funds and will
be required to cover any losses of principal from its own funds. The master
servicer will not be obligated, however, to cover any losses resulting from the
bankruptcy or insolvency of any depository institution or trust company holding
any of those accounts.
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PREPAYMENT INTEREST SHORTFALLS. The servicing and administration
agreement provides that, if any Prepayment Interest Shortfalls are incurred with
respect to the mortgage collateral during any collection period, the master
servicer must make a non-reimbursable payment with respect to the related
payment date in an amount equal to the lesser of:
- the total amount of those Prepayment Interest Shortfalls, and
- the sum of the following components of the master servicer's
total servicing compensation for that same collection period--[TO
BE SPECIFIED].
No other master servicing compensation will be available to cover Prepayment
Interest Shortfalls.
Any Payment made by the master servicer with respect to any payment
date to cover Prepayment Interest Shortfalls will be included among the amounts
payable as principal and interest on the series _____ bonds on that payment date
as described under "Description of the Offered Bonds--Payments" in this
prospectus supplement. If the amount of the payment made by the master servicer
with respect to any payment date to cover Prepayment Interest Shortfalls is less
than the total of all the Prepayment Interest Shortfalls incurred with respect
to the mortgage collateral during the related collection period, then the
resulting Net Aggregate Prepayment Interest Shortfall will be allocated among
the respective interest-bearing classes of the series _______ bonds, in
reduction of the interest payable on those bonds, as and to the extent described
under "Description of the Offered Bonds--Payments--Payments of Interest" in this
prospectus supplement.
PRINCIPAL SPECIAL SERVICING COMPENSATION. The principal compensation to
be paid to the special servicer with respect to its special servicing activities
will be--
- the successful operation and value of the underlying real
property, and
- the special servicing fee,
- the workout fee, and
- the liquidation fee.
The special servicing fee:
- will be earned with respect to each-
1. specially serviced mortgage loan, if any, and
2. each mortgage loan, if any, as to which the corresponding
underlying real property has been
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acquired by the trust through foreclosure or otherwise
following a default;
- with respect to each of those mortgage loans, will--
1. be calculated on a 30/360 basis,
2. accrue at a special servicing fee rate of ____% per annum,
and
3. accrue on the same principal amount as interest accrues or
is deemed to accrue from time to time on that mortgage loan,
and
- will be payable monthly from general collections on all the
mortgage loans and any REO Properties in the trust estate that
are on deposit in the master servicer's custodial account from
time to time.
THE WORKOUT FEE. The special servicer will, in general, be entitled to
receive a workout fee with respect to each worked-out mortgage loan in the trust
estate. The workout fee will be payable out of, and will be calculated by
application of a workout fee rate of ____% to, each collection of interest and
principal received on the mortgage loan for so long as it remains a worked-out
mortgage loan, exclusive of any portion of that collection that represents a
recovery of Default Interest or Post-ARD Additional Interest. The workout fee
with respect to any worked-out mortgage loan will cease to be payable if a new
Servicing Transfer Event occurs with respect to the loan. However, a new workout
fee would become payable if the mortgage loan again became a worked-out mortgage
loan with respect to that new Servicing Transfer Event. If the special servicer
is terminated other than for cause or resigns, it will retain the right to
receive any and all workout fees payable with respect to mortgage loans that
became worked-out mortgage loans during the period that it acted as special
servicer and remained worked-out mortgage loans at the time of its termination
or resignation. The successor special servicer will not be entitled to any
portion of those workout fees. Although workout fees are intended to provide the
special servicer with an incentive to better perform its duties, the payment of
any workout fee will reduce amounts payable to the series _______ bondholders.
THE LIQUIDATION FEE. The special servicer will be entitled to receive a
liquidation fee with respect to each specially serviced mortgage loan in the
trust estate for which it obtains a full or discounted payoff from the related
borrower. The special servicer will also be entitled to receive a liquidation
fee with respect to any specially serviced mortgage loan or REO Property in the
trust estate as to which it receives any liquidation proceeds, condemnation
proceeds or insurance proceeds, except as described in the next paragraph. As to
each specially serviced mortgage loan and REO Property in the trust estate, the
liquidation fee will be payable from, and will be calculated by application of a
liquidation fee rate of ____% to, the related payment or proceeds, exclusive of
any portion of that payment or proceeds that represents a recovery of Default
Interest or Post-ARD Additional Interest.
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Despite anything to the contrary described in the prior paragraph, no
liquidation fee will be payable based on, or out of, proceeds received in
connection with:
- the repurchase or replacement of any mortgage loan in the trust
estate by us for a breach of representation or warranty or for
defective or deficient mortgage loan documentation as described
under "Description of the Mortgage Collateral--Cures and
Repurchases" in this prospectus supplement; or
- the purchase of any defaulted mortgage loan or REO Property in
the trust estate by the master servicer or special servicer as
described under--Sale of Defaulted Mortgage Loans" below.
Although liquidation fees are intended to provide the special servicer
with an incentive to better perform its duties, the payment of any liquidation
fee will reduce amounts payable to the series ______ bondholders.
ADDITIONAL SPECIAL SERVICING COMPENSATION. As additional special
servicing compensation, the special servicer will be entitled to receive any
late payment charges and Default Interest collected with respect to pledged
mortgage loans in the trust estate, but only to the extent that those late
payment charges and Default Interest--
- accrued while the related mortgage loan was a specially serviced
mortgage loan, and
- have not otherwise been applied to pay the master servicer, the
special servicer or the bond trustee, as applicable, interest on
advances made the master servicer, the special servicer or the
bond trustee, as the case may be, with respect to the related
mortgage loan.
All modification fees, assumption fees, assumption application fees and
other comparable transaction fees and charges, if any, collected with respect to
the specially serviced mortgage loans in the trust estate, will be allocated
between the master servicer and the special servicer, as additional
compensation, or otherwise applied to cover related expenses, as provided in the
servicing and administration agreement.
In addition, the special servicer will be authorized to invest or
direct the investment of funds held in its REO account in Permitted Investments.
See "--REO Account below. The special servicer will be entitled to retain any
interest or other income earned on those funds and will be required to cover any
losses of principal from its own funds without any right to reimbursement. The
special servicer will not be obligated, however, to cover any losses resulting
from the bankruptcy or insolvency of any depository institution or trust company
holding the special servicer's REO account.
PAYMENT OF EXPENSES; SERVICING ADVANCES. Each of the master servicer
and the special servicer will be required to pay its overhead and any general
and administrative expenses incurred by it in connection with its servicing
activities under the servicing and administration agreement. The master
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servicer and the special servicer will not be entitled to reimbursement for
these expenses except as expressly provided in the servicing and administration
agreement.
Any and all customary, reasonable and necessary out of pocket costs
and expenses incurred by the master servicer or the special servicer in
connection with the servicing of a pledged mortgage loan after a default,
delinquency or other unanticipated event, or in connection with the
administration of any REO Property, will be servicing advances. Servicing
advances will be reimbursable from future payments and other collections,
including insurance proceeds, condemnation proceeds and liquidation proceeds, in
connection with the related mortgage loan or REO Property. In addition, the
special servicer may periodically require the master servicer to reimburse the
special servicer for any servicing advances made by it. Upon reimbursing the
special servicer for any servicing advance, the master servicer will be deemed
to have made the advance.
The special servicer may request the master servicer to make servicing
advances with respect to a specially serviced mortgage loan or REO Property, in
lieu of the special servicer's making that advance itself. The special servicer
must make the request in writing, in a timely manner that does not adversely
affect the interests of any series ______ bondholder. The master servicer must
make the requested servicing advance within a specified number of days following
the master servicer's receipt of the request. If the request is timely and
properly made, the special servicer will be relieved of any obligations with
respect to a servicing advance that it requests the master servicer to make,
regardless of whether or not the master servicer actually makes that advance.
If the master servicer or the special servicer is required under the
servicing and administration agreement to make a servicing advance, but neither
does so within _____ days after the servicing advance is required to be made,
then the bond trustee will be required:
- if it has actual knowledge of the failure, to give the defaulting
party notice of its failure; and
- if the failure continues for ______ more business days, to make
the servicing advance.
Despite the foregoing discussion or anything else to the contrary in
this prospectus supplement, none of the master servicer, the special servicer or
the bond trustee will be obligated to make servicing advances that, in the
reasonable and good faith judgment of any party making the servicing advance,
would not be ultimately recoverable from expected collections on the related
mortgage loan or REO Property. If the master servicer, the special servicer or
the bond trustee makes any servicing advance that it subsequently determines, in
its judgment, is not recoverable from expected collections on the related
mortgage loan or REO Property, it may obtain reimbursement for that advance,
together with interest on the advance, out of general collections on the
mortgage loans and any REO Properties on deposit in the master servicer's
custodial account from time to time.
The master servicer will be permitted to pay, and the special servicer
may direct the payment of, some servicing expenses directly out of the master
servicer's custodial account and at times without regard to the relationship
between the expense and the funds from which it is being paid. The most
significant of those servicing expenses relate to the
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remediation of any adverse environmental circumstance or condition at any of the
underlying real properties. In addition, the servicing and administration
agreement will require the master servicer, at the direction of the special
servicer if a specially serviced asset is involved, to pay directly out of the
master servicer's custodial account any servicing expense that, if advanced by
the master servicer or the special servicer, would not be recoverable from
expected collections on the related mortgage loan or REO Property. This is only
to be done, however, when the master servicer, or the special servicer if a
specially serviced asset is involved, has determined in accordance with the
Servicing Standard that making the payment is in the best interests of the
bondholders, as a collective whole.
The master servicer, the special servicer and the bond trustee will be
entitled to receive interest on servicing advances made by them. The interest
will accrue on the amount of each servicing advance, and compound monthly, for
so long as the servicing advance is outstanding, at a rate per annum equal to
the prime rate as published in the "Money Rates" section of THE WALL STREET
JOURNAL, as that prime rate may change from time to time. Interest accrued
with respect to any servicing advance will be payable in the collection period
in which that advance is reimbursed--
- FIRST, out of Default Interest and late payment charges collected
on the related mortgage loan during that collection period, and
- THEN, if and to the extent that the Default Interest and late
charges referred to in clause FIRST above are insufficient to
cover the advance interest, out of any amounts then on deposit in
the master servicer's custodial account.
SUB-SERVICERS
The master servicer and the special servicer may each delegate any of
its servicing obligations under the servicing and administration agreement to
any one or more third-party servicers. The master servicer or the special
servicer, as the case may be, will remain obligated under the servicing and
administration agreement for any duties delegated to a sub-servicer. Each
sub-servicing agreement between the master servicer or special servicer, as the
case may be, and a sub-servicer must provide that, if for any reason the master
servicer or special servicer, as the case may be, is no longer acting in that
capacity, the bond trustee or any other successor to the master servicer or
special servicer, as applicable, may:
- assume the party's rights and obligations under the sub-servicing
agreement;
- enter into a new sub-servicing agreement with the sub-servicer on
terms which are acceptable to the bond trustee or successor
master servicer or special servicer, as the case may be, and that
sub-servicer; or
- terminate the sub-servicing agreement without cause.
Some of the pledged mortgage loans that will be included in the trust estate,
are currently being serviced by third-party servicers that are entitled to and
will become sub-servicers of these loans on behalf of the master servicer.
Neither the bond trustee nor
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any other successor master servicer may terminate the sub-servicing agreement
for any of those sub-servicers without cause, unless it pays the particular
sub-servicer a termination fee.
The master servicer and special servicer will each be required to
monitor the performance of sub-servicers retained by it. The master servicer and
special servicer will each be solely liable for all fees owed by it to any
sub-servicer retained by it, irrespective of whether its compensation under the
servicing and administration agreement is sufficient to pay those fees. Each
sub-servicer will be reimbursed by the master servicer or special servicer, as
the case may be, for some of the expenditures which it makes, generally to the
same extent the master servicer or special servicer, as the case may be, would
be reimbursed under the servicing and administration agreement.
ENFORCEMENT OF DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
The master servicer or the special servicer, as applicable, will be
required to determine, in a manner consistent with the Servicing Standard,
whether to exercise any right the lender under any pledged mortgage loan may
have under either a due-on-sale or due-on-encumbrance clause to accelerate
payment of that mortgage loan. However, under the circumstances described below
in this paragraph, neither the master servicer nor the special servicer may
waive its rights or grant its consent under any due-on-sale or
due-on-encumbrance clause unless it has received written confirmation from each
applicable rating agency that this action would not result in the qualification,
downgrade or withdrawal of any of the then-current ratings then assigned by the
rating agency to the series ______ bonds. With respect to due-on-sale clauses,
this requirement will apply only if the outstanding principal balance of the
subject mortgage loan, together with the total outstanding principal balance of
all other pledged mortgage loans that are cross-collateralized with the subject
mortgage loan or have been made to the same borrower or affiliated borrowers, is
equal to or greater than a specified percentage of the then total principal
balance of the mortgage collateral. In the case of due-on-encumbrance
provisions, this requirement will always apply. In addition, the master servicer
may not waive its rights or grant its consent under any due-on-sale or
due-on-encumbrance clause without the consent of the special servicer.
MODIFICATIONS, WAIVERS, AMENDMENTS AND CONSENTS
The special servicer, with respect to the specially serviced mortgage
loans in the trust estate, and the master servicer, with respect to the other
pledged mortgage loans, each may, consistent with the Servicing Standard, agree
to:
- modify, waive or amend any term of any mortgage loan;
- extend the maturity of any mortgage loan;
- defer or forgive the payment of interest on and principal of any
mortgage loan;
- defer or forgive the payment of prepayment premiums, yield
maintenance charges and late payment charges on any mortgage
loan;
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- permit the release, addition or substitution of collateral
securing any mortgage loan; or
- permit the release, addition or substitution of the borrower or
any guarantor of any mortgage loan.
The ability of the special servicer or the master servicer to agree to any of
the foregoing, however, is subject to each of the following limitations,
conditions and restrictions:
- With limited exception, including with respect to standard
routine matters, the master servicer may not agree to modify,
waive or amend any term of, or take any of the other
above-referenced actions with respect to, any pledged mortgage
loans without the consent of the special servicer.
- With limited exception, including with respect to Post-ARD
Additional Interest, the special servicer may not agree to or
consent to the master servicer's agreeing to modify, waive or
amend of any term of, or take or consent to the master servicer's
taking any of the other above-referenced actions with respect to,
any mortgage loan in the trust estate, if doing so would--
1. affect the amount or timing of any related payment of
principal, interest or other amount payable under the
mortgage loan, or
2. in the special servicer's judgment, materially impair the
security for the mortgage loan or reduce the likelihood of
timely payment of amounts due on the mortgage loan,
unless a material default on the mortgage loan has occurred or,
in the special servicer's judgment, a default with respect to
payment on the mortgage loan is reasonably foreseeable, and the
modification, waiver, amendment or other action is reasonably
likely to produce a greater recovery to the bondholders, as a
collective whole, on a present value basis, than would
liquidation.
- The special servicer may not extend or consent to the master
servicer's extending the date on which any balloon payment is
scheduled to be due on any mortgage loan in the trust estate, to
a date beyond the earliest of--
1. the _____ anniversary of the mortgage loan's original stated
maturity date,
2. _____ years prior to the rated final payment date, and
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3. if the mortgage loan is secured by a mortgage solely or
primarily on the related borrower's leasehold interest in
the corresponding underlying real property, _____ years
prior to the end of the then current term of the related
ground lease, plus any unilateral options to extend.
- Neither the master servicer nor the special servicer may make or
permit any modification, waiver or amendment of any term of, or
take any of the other above-referenced actions with respect to,
any mortgage loan in the trust estate that would--
1. cause any of REMIC I, REMIC II or REMIC III to fail to
qualify as a REMIC under the Internal Revenue Code of 1986,
or
2. result in the imposition of any tax on prohibited
transactions or contributions after the startup date of any
of REMIC I, REMIC II or REMIC III under the Internal Revenue
Code of 1986;
- The special servicer may not permit or consent to the master
servicer's permitting any borrower to add or substitute any real
estate collateral for any pledged mortgage loan, unless the
special servicer has first--
1. determined, based upon an environmental assessment prepared
by an independent person who regularly conducts
environmental assessments, at the expense of the borrower,
that:
- the additional or substitute collateral is in
compliance with applicable environmental laws and
regulations, and
- that there are no circumstances or conditions present
with respect to the new collateral relating to the use,
management or disposal of any hazardous materials for
which investigation, testing, monitoring, containment,
clean-up or remediation would be required under any
then applicable environmental laws or regulations, and
2. received confirmation from each of __________ and __________
that the addition or substitution of collateral will not
result in a qualification, downgrade or withdrawal of any
rating then assigned by the rating agency to a class of
series _____ bonds.
- Subject to limited exceptions, the special servicer may not
release or consent to the master servicer's releasing any
material collateral securing an outstanding mortgage loan in the
trust estate other than in accordance with the terms of, or upon
satisfaction of, the mortgage loan.
The foregoing limitations, conditions and restrictions will not apply
to any of the acts referenced in this "--Modifications, Waivers, Amendments and
Consents" section that is required under the terms of the subject mortgage loan
in effect on the date of initial issuance of the offered bonds or that is solely
within the control of the related borrower. Also, neither the master
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servicer nor the special servicer will be required to oppose the confirmation of
a plan in any bankruptcy or similar proceeding involving a borrower if, in its
judgment, opposition would not ultimately prevent the confirmation of the plan
or one substantially similar, despite the discussion above.
Notwithstanding the foregoing, the master servicer will be permitted,
in the case of an ARD Loan, in its discretion, after the related anticipated
repayment date, to waive any or all of the Post-ARD Additional Interest accrued
on that mortgage loan, if the related borrower is ready and willing to pay all
other amounts due under the mortgage loan in full, including the entire
principal balance. However, the master servicer's determination to waive the
trust estate's right to receive that Post-ARD Additional Interest--
- must be in accordance with the Servicing Standard, and
- will be subject to approval by the special servicer.
The master servicer will not have any liability to the trust estate, the series
_____ bondholders or any other person for any determination to waive the trust
estate's right to receive Post-ARD Additional Interest that is made in
accordance with the Servicing Standard. The servicing and administration
agreement will also limit the master servicer's and the special servicer's
ability to institute an enforcement action solely for the collection of Post-ARD
Additional Interest.
All modifications, waivers and amendments entered into with respect to
the pledged mortgage loans securing or underlying the security for the bonds are
to be in writing. Each of the master servicer and the special servicer must
deliver to the bond trustee for deposit in the related mortgage file, an
original counterpart of the agreement relating to each modification, waiver or
amendment agreed to by it, promptly following its execution.
REQUIRED APPRAISALS
Promptly following the occurrence of any Appraisal Trigger Event with
respect to any of the pledged mortgage loans, the special servicer must obtain,
and deliver to the bond trustee and master servicer a copy of, an appraisal of
the related underlying real property from an independent appraiser meeting the
qualifications imposed in the servicing and administration agreement, unless an
appraisal of the related underlying real property had previously been obtained
within the prior _____ months.
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Notwithstanding the foregoing, if the unpaid principal balance of the
subject mortgage loan, net of related unreimbursed advances of principal, is
less than $______________, the special servicer may perform an internal
valuation of the underlying real property.
As a result of any appraisal or other valuation, it may be determined
that an Appraisal Reduction Amount exists with respect to the subject mortgage
loan.
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An Appraisal Reduction Amount is relevant to the determination of the
amount of any advances of delinquent interest required to be made with respect
to the affected mortgage loan. See "Description of the Offered Bonds--Advances
of Delinquent Monthly Debt Service Payments" in this prospectus supplement.
If an Appraisal Trigger Event occurs with respect to any pledged
mortgage loan in the trust estate, then the special servicer will have an
ongoing obligation to obtain or perform, as the case may be, within _____ days
of each anniversary of the occurrence of that Appraisal Trigger Event, an update
of the prior required appraisal or other valuation. Based upon that update, the
special servicer is to redetermine and report to the bond trustee and the master
servicer the new Appraisal Reduction Amount, if any, with respect to the
mortgage loan. This ongoing obligation will cease if and when--
- the subject mortgage loan has become a worked-out mortgage loan
as contemplated under "--General" above,
- the subject mortgage loan has remained current for at least _____
consecutive monthly debt service payments, and
- no other Servicing Transfer Event has occurred with respect to
the subject mortgage loan during the preceding _____ months.
The cost of each required appraisal, and any update of each required
appraisal, will be advanced by the master servicer and will be reimbursable to
the master servicer as a servicing advance.
CUSTODIAL ACCOUNT
GENERAL. The master servicer will be required to establish and maintain
a custodial account for purposes of holding payments and other collections that
it receives with respect to the pledged mortgage loans. That custodial account
must be maintained in a manner and with a
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depository institution that satisfies rating agency standards for
securitizations similar to the one involving the offered bonds.
The funds held in the master servicer's custodial account may be held
as cash or invested in Permitted Investments. Any interest or other income
earned on funds in the master servicer's custodial account will be paid to the
master servicer as additional compensation subject to the limitations set forth
in the servicing and administration agreement.
DEPOSITS. Under the servicing and administration agreement, the master
servicer must deposit or cause to be deposited in its custodial account within
one business day following receipt, in the case of payments and other
collections on the pledged mortgage loans, or as otherwise required under the
servicing and administration agreement, the following payments and collections
received or made by or on behalf of the master servicer with respect to the
mortgage collateral subsequent to the date of initial issuance of the offered
bonds, other than monthly debt service payments due on or before the cut-off
date, which monthly debt service payments belong to the related mortgage loan
seller:
- all payments on account of principal on the mortgage loans,
including principal prepayments;
- all payments on account of interest on the mortgage loans,
including Default Interest and Post-ARD Additional Interest;
- all prepayment premiums, yield maintenance charges and late
payment charges collected with respect to the mortgage loans;
- all proceeds received under any hazard, flood, title or other
insurance policy that provides coverage with respect to an
underlying real property or the related mortgage loan, and all
proceeds received in connection with the condemnation or the
taking by right of eminent domain of an underlying real property,
in each case to the extent not otherwise required to be applied
to the restoration of the underlying real property or released to
the related borrower;
- all amounts received and retained in connection with the
liquidation of defaulted mortgage loans by foreclosure or as
otherwise contemplated under "--Realization Upon Defaulted
Mortgage Loans" below;
- any amounts paid by us in connection with the repurchase or
replacement of a mortgage loan as described under "Description of
the Mortgage Collateral--Cures and Repurchases" in this
prospectus supplement;
- any amounts required to be deposited by the master servicer in
connection with losses incurred with respect to Permitted
Investments of funds held in the custodial account;
- all payments required to be paid by the master servicer or the
special servicer with respect to any deductible clause in any
blanket insurance policy as
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described under "Description of the Mortgage Collateral--
Underwriting Matters--Hazard, Liability and Other Insurance" in
this prospectus supplement;
- any amount required to be transferred from the special servicer's
REO account; and
- any amounts required to be transferred from any debt service
reserve accounts with respect to the mortgage loans.
Upon receipt of any of the amounts described in the first five bullet
points of the prior paragraph with respect to any specially serviced mortgage
loan in the trust estate, the special servicer is required to promptly remit
these amounts to the master servicer for deposit in the master servicer's
custodial account.
WITHDRAWALS. The master servicer may make withdrawals from its
custodial account for any of the following purposes, which are NOT listed in any
order of priority: ---
1. to remit to the bond trustee for deposit in the bond trustee's
collection account described under "Description of the Offered
Bonds--Collection Account" in this prospectus supplement on the
business day preceding each payment date, all payments and other
collections on the mortgage loans and any REO Properties in the
trust estate that are then on deposit in the custodial account,
exclusive of any portion of those payments and other collections
that represents one or more of the following--
- monthly debt service payments due on a due date subsequent
to the end of the related collection period,
- payments and other collections received after the end of the
related collection period, and
- amounts that are payable or reimbursable from the custodial
account to any person other than the series-bondholders in
accordance with any of clauses 2 through 17 below;
2. to reimburse itself, the special servicer or the bond trustee, as
applicable, for any unreimbursed advances made by that party
under the servicing and administrations agreement, and the
reimbursement for those advances is to be made out of collections
on the mortgage loan or REO Property as to which the advance was
made;
3. to pay itself earned and unpaid master servicing fees with
respect to each pledge mortgage loan in the trust estate, and
payment for those fees is to be made out of collections on that
mortgage loan that are allocable as interest;
4. to pay the special servicer, out of general collections on the
mortgage loans and any REO Properties, earned and unpaid special
servicing fees with respect to each pledged mortgage loan that is
either--
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- a specially serviced mortgage loan, or
- a mortgage loan as to which the related underlying real
property has become an REO Property;
5. to pay the special servicer earned and unpaid workout fees and
liquidation fees to which it is entitled, and payment of those
fees is to be made from the sources described under "--Servicing
and Other Compensation and Payment of Expenses" above;
6. to reimburse itself, the special servicer or the bond trustee, as
applicable, out of general collections on the mortgage loans and
any REO Properties in the trust estate, for any unreimbursed
advance made by that party under the servicing and administration
agreement that has been determined not to be ultimately
recoverable under clause 2 above;
7. to pay itself, the special servicer or the bond trustee, as
applicable, unpaid interest on any advance made by that party
under the servicing and administration agreement, and payment of
any unpaid interest is to be made out of Default Interest and
late payment charges received--
- with respect to the mortgage loan as to which the advance
was made and
- during the collection period in which that advance is
reimbursed;
8. in connection with the reimbursement of advances as described in
clause 2 or 6 above, to pay itself, the special servicer or the
bond trustee, as the case may be, out of general collections on
the mortgage loans and any REO Properties in the trust estate,
any interest accrued and payable on that advance and not
otherwise payable under clause 7 above;
9. to pay itself any items of additional master servicing
compensation on deposit in the custodial account as discussed
under "--Servicing and Other Compensation and Payment of
Expenses--Additional Master Servicing Compensation" above;
10. to pay the special servicer any items of additional special
servicing compensation on deposit in the custodial account as
discussed under "--Servicing and Other Compensation and Payment
of Expenses--Additional Special Servicing Compensation" above;
11. to pay any unpaid liquidation expenses incurred with respect to
any liquidated mortgage loan or REO Property in the trust estate,
and payment of those expenses is to be made out of collections on
that mortgage loan or REO Property, as the case may be;
12. to pay, out of general collections on the mortgage loans and any
REO Properties in the trust estate, any servicing expenses that
would, if advanced, be nonrecoverable under clause 2 above;
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13. to pay, out of general collections on the mortgage loans and any
REO Properties in the trust estate, for costs and expenses
incurred by the trust estate in connection with the remediation
of adverse environmental conditions at any underlying real
property that secures a defaulted mortgage loan in the trust
estate;
14. to pay itself, the special servicer, the bond trustee or any of
their or our respective directors, officers, employees and
agents, as the case may be, out of general collections on the
mortgage loans and any REO Properties in the trust estate, any of
the reimbursements or indemnities to which any of those other
persons or entities are entitled as described under "Description
of the Governing Documents--Matters Regarding the Master
Servicer, the Special Servicer, the Manager and the Issuers" in
the accompanying prospectus;
15. to pay, out of general collections on the mortgage loans and any
REO Properties in the trust estate, for the costs of opinions of
counsel, the cost of recording the servicing and administration
agreement and expenses properly incurred by the tax administrator
in connection with providing advice to the special servicer;
16. to pay any other items described in this prospectus supplement as
being payable from the custodial account;
17. to withdraw amounts deposited in the custodial account in error,
including amounts received on any mortgage loan or REO Property
that has been purchased or otherwise removed from the trust
estate; and
18. to clear and terminate the custodial account upon the termination
of the servicing and administration agreement.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The servicing and administration agreement grants to the master
servicer and the special servicer, a right to purchase from the trust estate
defaulted mortgage loans in the priority described in the next paragraph.
If the special servicer has determined, in its judgment, that the sale
of any defaulted mortgage loan, on behalf of the series ____ bondholders under
the circumstances described below in this paragraph is in accordance with the
Servicing Standard, the special servicer must give prompt written notice of its
determination to the bond trustee and the master servicer. For a limited period,
either the special servicer or the master servicer, in that order of priority,
may at its option purchase the defaulted mortgage loan at a cash generally equal
to the outstanding principal balance of, all accrued and unpaid interest on and
all unreimbursed servicing advances with respect to, the subject mortgage loan.
Each of the master servicer and the special servicer may designate an affiliate
to complete the purchase.
The special servicer may offer to sell, on behalf of the series _______
bondholders any defaulted mortgage loan not otherwise purchased as described in
the preceding paragraph, if and when the special servicer determines, consistent
with the Servicing Standard, that a sale would be in the best economic interests
of the series _______ bondholders, as a collective whole. Any offer must be made
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in a commercially reasonable manner for a period of not less than _____ days.
Subject to the discussion in the next paragraph, the special servicer will be
required to accept the highest cash bid received from any person that is a fair
price, determined in accordance with the servicing and administration agreement,
for the mortgage loan.
The special servicer will not be obligated to accept the highest cash
bid if the special servicer determines, in accordance with the Servicing
Standard, that rejection of the highest cash bid would be in the best interests
of the series _______ bondholders, as a collective whole. Furthermore, the
special servicer may accept a lower cash bid from any person or entity other
than itself or an affiliate if it determines, in accordance with the Servicing
Standard, that acceptance of the bid would be in the best interests of the
series _______ bondholders, as a collective whole. For example, the prospective
buyer making the lower bid may be more likely to perform its obligations or the
terms, other than the price, offered by the prospective buyer making the lower
bid may be more favorable.
Neither the bond trustee, in its individual capacity, nor any of its
affiliates may bid for or purchase from the trust estate any defaulted mortgage
loan or any REO Property.
In connection with the sale of any defaulted mortgage loan, on behalf
of the series _______ bondholders, the special servicer may charge prospective
bidders, and retain, fees that approximate the special servicer's actual costs
in the preparation and delivery of information pertaining to the sales or
evaluating bids without obligation to deposit the amounts into its collection
account.
If a default on a pledged mortgage loan has occurred or, in the special
servicer's judgment, a payment default is imminent, then the special servicer
may, on behalf of the bondholders and the issuer, take any of the following
actions:
- institute foreclosure proceedings;
- exercise any power of sale contained in the related mortgage;
- obtain a deed in lieu of foreclosure; or
- otherwise acquire title to the corresponding underlying real
property, by operation of law or otherwise.
The special servicer may not, however, acquire title to any underlying
real property, have a receiver of rents appointed with respect to any underlying
real property or take any other action with respect to any underlying real
property that would cause the bond trustee, for the benefit of the bondholders
and the issuer , 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 the particular real property within the meaning of the federal environmental
laws, unless--
- the special servicer has previously received a report prepared by
a person who regularly conducts environmental audits, which
report will be an expense of the trust, and
- either:
1. the report indicates that--
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- the particular real property is in compliance with
applicable environmental laws and regulations, and
- there are no circumstances or conditions present at the
real property that have resulted in any contamination
for which investigation, testing, monitoring,
containment, clean-up or remediation could be required
under any applicable environmental laws and
regulations; or
2. the special servicer, based solely as to environmental
matters and related costs on the information set forth in
the report, determines that taking the actions necessary to
bring the particular real property into compliance with
applicable environmental laws and regulations and/or taking
any of the other actions contemplated by clause 1 above, is
reasonably likely to produce a greater recovery, taking into
account the time value of money, than not taking those
actions.
If the trust estate acquires title to any underlying real property, the
special servicer, on behalf of the bondholders and the issuer, has to sell the
particular real property prior to the close of the third taxable year following
the taxable year in which that acquisition occurred, subject to limited
exceptions as described under "--REO Properties" below.
If liquidation proceeds collected with respect to a defaulted mortgage
loan in the trust estate are less than the outstanding principal balance of the
defaulted mortgage loan, together with accrued interest on and reimbursable
expenses incurred by the special servicer and/or the master servicer in
connection with the defaulted mortgage loan, then the trust estate will realize
a loss in the amount of the shortfall. The special servicer and/or the master
servicer will be entitled to reimbursement out of the liquidation proceeds
recovered on any defaulted mortgage loan, prior to the payment of the
liquidation proceeds to the series ____ bondholders, for--
- any and all amounts that represent unpaid servicing compensation
with respect to 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.
In addition, amounts otherwise payable on the series _____ bonds may be further
reduced by interest payable to the master servicer and/or special servicer on
the servicing expenses and advances.
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REO PROPERTIES
If title to any underlying real property is acquired by the special
servicer on behalf of the trust estate, the special servicer will be required to
sell that property not later than the end of the third calendar year following
the year of acquisition, unless--
- the IRS grants an extension of time to sell the property, or
- the special servicer obtains an opinion of independent counsel
generally to the effect that the holding of the property
subsequent to the end of the third calendar year following the
year in which the acquisition occurred will not result in the
imposition of a tax on the trust estate or cause any of REMIC I,
REMIC II or REMIC III to fail to qualify as a REMIC under the
Internal Revenue Code of 1986.
Subject to the foregoing, the special servicer will generally be
required to solicit cash offers for any REO Property held by the trust estate in
a manner that will be reasonably likely to realize a fair price for the
property. The special servicer may retain an independent contractor to operate
and manage any REO Property. The retention of an independent contractor will not
relieve the special servicer of its obligations with respect to the REO
Property. Regardless of whether the special servicer applies for or is granted
an extension of time to sell the property, the special servicer must act in
accordance with the Servicing Standard to liquidate the REO Property on a timely
basis. If an extension is granted or opinion given, the special servicer must
sell the REO Property within the period specified in the extension or opinion.
In general, the special servicer or an independent contractor employed
by the special servicer at the expense of the trust estate will be obligated to
operate and manage any REO Property held by the trust estate in a manner that:
1. maintains its status as foreclosure property under the REMIC
provisions of the Internal Revenue Code of 1986, and
2. is in accordance with the Servicing Standard.
The special servicer must review the operation of each REO Property
held by the trust estate and consult with the bond trustee, or any person
appointed by the bond trustee to act as tax administrator, to determine the
trust estate's federal income tax reporting position with respect to the
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income it is anticipated that the trust estate would derive from the property.
The special servicer could determine that it would not be consistent with the
Servicing Standard to manage and operate the property in a manner that would
avoid the imposition of--
- a tax on net income from foreclosure property, within the meaning
of Section 857(b)(4)(B) of the Internal Revenue Code of 1986, or
- a tax on prohibited transactions under Section 860F of the
Internal Revenue Code of 1986.
This determination is most likely to occur in the case of an REO Property that
is a hotel or residential health care facility. To the extent that income the
trust estate receives from an REO Property is subject to--
- a tax on net income from foreclosure property, that income would
be subject to federal tax at the highest marginal corporate tax
rate, which is currently 35%, or
- a tax on prohibited transactions, that income would be subject to
federal tax at a 100% rate.
The determination as to whether income from an REO Property held by the
trust estate would be subject to a tax will depend on the specific facts and
circumstances relating to the management and operation of each REO Property.
Generally, income from an REO Property that is directly operated by the special
servicer would be apportioned and classified as service or non-service
income. The service portion of the income could be subject to federal tax
either at the highest marginal corporate tax rate or at the 100% rate. The
non-service portion of the income could be subject to federal tax at the
highest marginal corporate tax rate or, although it appears unlikely, at the
100% rate. Any tax imposed on the trust estate's income from an REO Property
would reduce the amount available for payment to the series _____ bondholders.
See "Federal Income Tax Consequences" in this prospectus supplement and in the
accompanying prospectus. The reasonable out-of-pocket costs and expenses of
obtaining professional tax advice in connection with the foregoing will be
payable out of the master servicer's custodial account.
The special servicer will be required to segregate and hold all funds
collected and received in connection with any by the trust estate REO Property
held by the trust estate separate and apart from its own funds and general
assets. If an REO Property is acquired by the trust estate , the special
servicer will be required to establish and maintain an account for the retention
of revenues and other proceeds derived from the REO Property. That REO account
must be maintained in a manner and with a depository institution that satisfies
rating agency standards for securitizations similar to the one involving the
offered bonds. The special servicer will be required to deposit, or cause to be
deposited, in its REO account, upon receipt, all net income, insurance proceeds,
condemnation proceeds and liquidation proceeds received with respect to each REO
Property held by the trust estate. The funds held in this REO account may be
held as cash or invested in Permitted Investments. Any interest or other income
earned on funds in the special servicer's REO account will be payable to the
special servicer, subject to the limitations described in the servicing and
administration agreement.
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The special servicer will be required to withdraw from its REO account
funds necessary for the proper operation, management, leasing, maintenance and
disposition of any REO Property held by the trust estate, but only to the extent
of amounts on deposit in the account relating to that particular REO Property.
Promptly following the end of each collection period, the special servicer will
be required to withdraw from the REO account and deposit, or deliver to the
master servicer for deposit, into the master servicer's custodial account the
total of all amounts received with respect to each REO Property held by the
trust estate during that collection period, net of--
- any withdrawals made out of those amounts as described in the
preceding sentence, and
- any portion of those amounts that may be retained as reserves as
described in the next sentence.
The special servicer may, subject to those limitations described in the
servicing and administration agreement, retain in its REO account the portion of
the proceeds and collections as may be necessary to maintain a reserve of
sufficient funds for the proper operation, management, leasing, maintenance and
disposition of the related REO Property, including the creation of a reasonable
reserve for repairs, replacements, necessary capital improvements and other
related expenses.
The special servicer shall keep and maintain separate records, on a
property-by-property basis, for the purpose of accounting for all deposits to,
and withdrawals from, its REO account.
INSPECTIONS; COLLECTION OF OPERATING INFORMATION
The special servicer will be required, at the expense of the trust
estate, to inspect or cause an inspection of the corresponding underlying real
property as soon as practicable after any pledged mortgage loan becomes a
specially serviced pledged mortgage loan. The master servicer also will be
required, at its own expense, to inspect or cause an inspection of each
underlying real property at least once every _______________, if the special
servicer has not already undertaken an inspection in that period as described in
the preceding sentence. The master servicer and the special servicer will each
be required to prepare or cause the preparation of a written report of each
inspection performed by it that generally describes the condition of the
particular real property and that specifies--
- any sale, transfer or abandonment of the property of which the
master servicer or the special servicer, as applicable, is aware,
or
- any change in the property's condition, occupancy or value that
the master servicer or the special servicer, as applicable, in
accordance with the Servicing Standard, considers to be material.
The special servicer, in the case of each specially serviced mortgage
loan, and the master servicer, in the case of each other mortgage loan in the
trust estate, will each be required to use reasonable efforts to collect from
the related borrower and review the following items, to the extent that those
items are required to be delivered under the related loan documents:
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1. the quarterly and annual operating statements, budgets and rent
rolls of the corresponding underlying real property; and
2. the quarterly and annual financial statements of the borrower.
The special servicer will also be required to cause quarterly and
annual operating statements, budgets and rent rolls to be prepared for each REO
Property in the trust estate. However, there can be no assurance that any
operating statements required to be delivered by a borrower will in fact be
delivered, nor is the master servicer or the special servicer likely to have any
practical means of compelling delivery.
EVIDENCE AS TO COMPLIANCE
On or before _____________ of each year, beginning ______________, each
of the master servicer and the special servicer must--
- at its expense, cause a firm of independent public accountants,
that is a member of the American Institute of Certified Public
Accountants to furnish a statement to the bond trustee, among
others, to the effect that--
1. the firm has examined the servicing operations of the master
servicer or the special servicer, as the case may be, for
the previous year, and
2 on the basis of that examination, conducted substantially in
compliance with the USAP, the firm confirms that the master
servicer or the special servicer, as applicable, has
complied with the minimum servicing standards identified in
USAP, in all material respects, except for the significant
exceptions or errors in records that, in the opinion of the
firm, USAP requires it to report.
In rendering its report the firm may rely, as to matters relating
to the direct servicing of commercial and multifamily mortgage
loans by sub-servicers, upon comparable reports of firms of
independent certified public accountants rendered on the basis of
examinations conducted in accordance with the same standards,
within one year of the report, with respect to those
sub-servicers.
- deliver to the bond trustee, among others, a statement signed by
an officer of the master servicer or the special servicer, as the
case may be, to the effect that, to the best knowledge of that
officer, the master servicer or special servicer, as the case may
be, has fulfilled its obligations under the servicing and
administration agreement in all material respects throughout the
preceding calendar year or portion of that year during which the
series ______ bonds were outstanding.
SERVICING EVENTS OF DEFAULT
Each of the following events, circumstances and conditions will be
considered events of default under the servicing and administration agreement:
S-96
<PAGE>
- the master servicer or the special servicer fails to deposit, or
to remit to the appropriate party for deposit, into the master
servicer's custodial account or the special servicer's REO
account, as applicable, any amount required to be so deposited,
and that failure continues unremedied for ______ business days
following the date on which the deposit or remittance was
required to be made;
- the master servicer fails to remit to the bond trustee for
deposit in the bond trustee's collection account any amount
required to be so remitted, and that failure continues unremedied
for _____ business days following the date on which the
remittance was required to be made;
- the master servicer or the special servicer fails to timely make
any servicing advance required to be made by it under the
servicing and administration agreement, and that failure
continues unremedied for _____ business days following the date
on which notice has been given to the master servicer or the
special servicer, as the case may be, by the bond trustee;
- the master servicer or the special servicer fails to observe or
perform in any material respect any of its other covenants or
agreements under the servicing and administration agreement, and
that failure continues unremedied for _____ days after written
notice of it has been given to the master servicer or the special
servicer, as the case may be, by any other party to the servicing
and administration agreement or by series ______ bondholders
entitled to not less than ____% of the voting rights for the
series;
- it is determined that there is a breach by the master servicer or
the special servicer of any of its representations or warranties
contained in the servicing and administration agreement that
materially and adversely affects the interests of any class of
series ______ bondholders, and that breach continues unremedied
for _____ days after written notice of it has been given to the
master servicer or the special servicer, as the case may be, by
any other party to the servicing and administration agreement or
by the series ______ bondholders entitled to not less than ____%
of the voting rights for the series;
- a decree or order of a court having jurisdiction in an
involuntary case for the appointment of a receiver, liquidator,
bond trustee or similar official in any bankruptcy, insolvency,
readjustment of debt, marshalling of assets and liabilities or
similar proceedings is entered against the master servicer or the
special servicer and the decree or order remains in force for a
period of _____ days;
- the master servicer or special servicer consents to the
appointment of a receiver, liquidator, bond trustee or similar
official relating to it or of or relating to all or substantially
all of its property;
- the master servicer or special servicer admits in writing its
inability to pay its debts or take other actions indicating its
insolvency or inability to pay its obligations;
S-97
<PAGE>
- one or more ratings assigned by either ____________ or
____________ to the series ______ bonds are qualified, downgraded
or withdrawn as a result of the master servicer or special
servicer acting in that capacity; and
- the bond trustee receives written notice from either ____________
or ____________ that the continuation of the master servicer or
the special servicer, as the case may be, in that capacity would
result in a qualification, downgrade or withdrawal of any rating
then assigned by that rating agency to any class of the series
______ bonds.
When a single entity acts as master servicer and special servicer, an
event of default in one capacity will be an event of default in the other
capacity.
RIGHTS UPON EVENT OF DEFAULT
If an event of default described above under "--Events of Default"
occurs with respect to the master servicer or the special servicer and remains
unremedied, the bond trustee will be authorized, and at the direction of series
"______" bondholders entitled to ____% of the voting rights for the series, the
trustee will be required, to terminate all of the rights and obligations of the
defaulting party under the servicing and administration agreement and in and to
the trust estate other than any rights the defaulting party may have as a series
______ bondholder. Upon any termination, the bond trustee must either:
- succeed to all of the responsibilities, duties and liabilities of
the master servicer or special servicer, as the case may be,
under the servicing and administration agreement; or
- appoint an established mortgage loan servicing institution to act
as successor master servicer or special servicer, as the case may
be.
Series ______ bondholders entitled to ___% of the voting rights for the
series may require the bond trustee to appoint an established mortgage loan
servicing institution to act as successor master servicer or special servicer,
as the case may be, rather than have the bond trustee act as that successor.
In general, the series ______ bondholders entitled to at least ____% of
the voting rights allocated to each class of bonds affected by any event of
default may waive the event of default. However the events of default described
in the bullet points under "--Events of Default" above may only be waived by all
of the series ______ bondholders. Upon any waiver of an event of default, the
event of default will cease to exist and will be deemed to have been remedied
for every purpose under the servicing and administration agreement.
S-98
<PAGE>
DESCRIPTION OF THE OFFERED BONDS
GENERAL
The series ______ bonds will be issued, on or about
____________________, under to the indenture. They will be secured, nonrecourse
obligations of the issuer and will be payable solely out of the mortgage
collateral and the other assets of the trust estate. The trust estate will
include:
- the pledged mortgage loans;
- any and all payments under and proceeds of the pledged mortgage
loans received after the cut-off date, exclusive of payments of
principal, interest and other amounts due on or before that date;
- the loan documents for the pledged mortgage loans;
- any REO Properties acquired by the trust estate with respect to
defaulted mortgage loans; and
- those funds or assets as from time to time are deposited in the
master servicer's custodial account, the special servicer's REO
account, the bond trustee's collection account described under
"--Collection Account" below) or the bond trustee's interest
reserve account described under "--Payments--Interest Reserve
Account" below); and
The series _____ bonds will include the following classes:
- the A-1, A-2, B, C, D, E, F and X classes, which are the classes
series ______ of bonds that are offered by this prospectus
supplement, and
- the G, H, J, K, L, M, N, R-I, R-II and R-III classes, which are
the classes of series _____ bonds that--
1. will be retained or privately placed by us, and
2. are not offered by this prospectus supplement.
S-99
<PAGE>
The class A-1, A-2, B, C, D, E, F, G, H, J, K, L, M and N bonds are the
only bonds that will have principal balances. The principal balance of any of
these bonds will represent the total payments of principal to which the holder
of the bond is entitled over time out of payments, or advances in lieu thereof,
and other collections on the mortgage collateral and other assets of the trust
estate. Accordingly, on each payment date, the principal balance of each of
these bonds will be permanently reduced by any payments of principal actually
made with respect to the
S-100
<PAGE>
bond on that payment date. See "--Payments" below. On
any particular payment date, the principal balance of each of these bonds may
also be permanently reduced, without any corresponding payment, in connection
with losses on the mortgage collateral and default-related and otherwise
unanticipated expenses of the trust estate. See "--Reductions in Bond Principal
Balances in Connection with Realized Losses and Additional Mortgage Collateral
Expenses" below.
The class X bonds will not have principal balances, and the holders of
the class X bonds will not be entitled to receive payments of principal.
However, each class X bond will have a notional amount for purposes of
calculating the accrual of interest with respect to that bond. The total
notional amount of all the class X bonds will equal the total principal balance
of all the class A-1, A-2, B, C, D, E, F, G, H, J, K, L, M and N bonds
outstanding from time to time.
In general, principal balances and notional amounts will be reported on
a class-by-class basis. In order to determine the principal balance or notional
amount of any of your offered bonds from time to time, you may multiply the
original principal balance or notional amount of that bond as of the date of
initial issuance of the offered bonds, as specified on the face of that bond, by
the then-applicable bond factor for the relevant class. The bond factor for any
class of offered bonds, as of any date of determination, will equal a fraction,
expressed as a percentage, the numerator of which will be the then outstanding
total principal balance or notional amount, as applicable, of that class, and
the denominator of which will be the original total principal balance or
notional amount, as applicable, of that class. Bond factors will be reported
monthly in the bond trustee's payment date statement.
REGISTRATION AND DENOMINATIONS
GENERAL. The offered bonds will be issued in book-entry form in original
denominations of:
- in the case of the class X bonds, $_______ initial notional amount and
in any whole dollar denomination in excess of $_______; and
- in the case of the other offered bonds, $_______ initial principal
balance and in any whole dollar denomination in excess of $_______.
Each class of offered bonds will initially be represented by one or
more bonds registered in the name of Cede & Co., as nominee of The Depository
Trust Company. You will not be entitled to receive an offered bond issued in
fully registered, certificated form, except under the limited circumstances
described in the accompanying prospectus under "Description of the
Bonds--Book-Entry Registration". For so long as any class of offered bonds is
held in book-entry form--
- all references to actions by holders of those bonds will refer to
actions taken by DTC upon instructions received from beneficial owners
of those bonds through its participating organizations, and
- all references in this prospectus supplement to payments, notices,
reports, statements and other information to holders of those bonds
will refer to payments, notices, reports and statements to DTC or Cede
& Co., as the registered holder of those
S-101
<PAGE>
bonds, for payment to beneficial owners of offered bonds through its
participating organizations in accordance with DTC's procedures.
The bond trustee will initially serve as registrar for purposes of
providing for the registration of the offered bonds and, if and to the extent
physical securities are issued to the actual beneficial owners of any of the
offered bonds, the registration of transfers and exchanges of those bonds.
For a discussion of DTC, see "Description of the Bonds--Book-Entry
Registration" in the accompanying prospectus.
COLLECTION ACCOUNT
GENERAL. The bond trustee must establish and maintain an account in
which it will hold funds pending their payment on the series _______ bonds and
from which it will make those payments. That collection account must be
maintained in a manner and with a depository institution that satisfies rating
agency standards for securitizations similar to the one involving the offered
bonds. Funds held in the bond trustee's collection account will remain
uninvested.
DEPOSITS. On the business day prior to each payment date, the master
servicer will be required to remit to the bond trustee for deposit in the
collection account the following funds:
- All payments and other collections on the mortgage loans and any
REO Properties in the trust estate that are then on deposit in
the master servicer's custodial account, exclusive of any portion
of those payments and other collections that represents one or
more of the following:
1. monthly debt service payments due on a due date subsequent
to the end of the related collection period;
2. payments and other collections received after the end of the
related collection period;
3. amounts that are payable or reimbursable from the master
servicer's custodial account to any person other than the
series _______ bondholders, including--
- amounts payable to the master servicer or the special
servicer as compensation, including master servicing
fees, special servicing fees, workout fees, liquidation
fees, assumption fees, modification fees and, to the
extent not otherwise applied to cover interest on
advances, Default Interest and late payment charges,
- amounts payable in reimbursement of outstanding
advances, together with interest on those advances, and
- amounts payable with respect to other expenses of the
trust estate; and
4. amounts deposited in the master servicer's custodial account
in error.
S-102
<PAGE>
- Any advances of delinquent monthly debt service payments made
with respect to that payment date.
- Any payments made by the master servicer to cover Prepayment
Interest Shortfalls incurred during the related collection
period.
See "--Advances of Delinquent Monthly Debt Service Payments" below and
"Servicing of the Pledged Mortgage Loans--Custodial Account" and "Servicing and
Other Compensation and Payment of Expenses" in this prospectus supplement.
With respect to each payment date that occurs during March, commencing
in March ______, the bond trustee will be required to transfer from its interest
reserve account, which we describe under "--Interest Reserve Account" below, to
its collection account the interest reserve amounts that are then being held in
that interest reserve account with respect to those pledged mortgage loans that
accrue interest on an actual/360 basis.
WITHDRAWALS. The bond trustee may from time to time make withdrawals
from its collection account for any of the following purposes:
- to pay itself a monthly fee which is described under "--The Bond
Trustee" below;
- to indemnify itself and various related persons as described
under "Description of the Governing Documents--General--The Bond
Trustee" in the accompanying prospectus;
- to pay for any opinions of counsel required to be obtained in
connection with any amendments to the governing documents;
- to pay any federal, state and local taxes imposed on the trust
estate, the mortgage collateral or other assets included in the
trust estate, and/or transactions involving the trust estate,
together with all incidental costs and expenses, that are
required to be borne by the trust estate as described under
"Federal Income Tax Consequences--REMICs--Prohibited Transactions
Tax and Other Taxes" in the accompanying prospectus and
"Servicing of the Pledged Mortgage Loans--REO Properties" in this
prospectus supplement;
- with respect to each payment date during February of any year or
during January of any year that is not a leap year, commencing in
______, to transfer to the bond trustee's interest reserve
account the interest reserve amounts required to be so
transferred in that month with respect to those pledged mortgage
loans that accrue interest on an actual/360 basis; and
- to pay to the person entitled thereto any amounts deposited in
the collection account in error.
On each payment date, all amounts on deposit in the bond trustee's
collection account, exclusive of any portion of those amounts that are to be
withdrawn for the purposes contemplated in the foregoing paragraph, will be
withdrawn and applied to make for payments on the series ______ bonds. For any
payment date, those funds
S-103
<PAGE>
will consist of three separate components--
- the portion of those funds that represent prepayment
consideration collected on the pledged mortgage loans as a result
of voluntary or involuntary prepayments that occurred during the
related collection period, which will be paid to the holders of
the offered bonds as described under "--Payments--Payments of
Prepayment Premiums and Yield Maintenance Charges" below,
- the portion of those funds that re present Post-ARD Additional
Interest collected on the ARD Loans in the trust estate during
the related collection period, which will be paid to the holders
of the class _____ bonds as described under "--Payments--Payments
of Post-ARD Additional Interest" below, and
- the remaining portion of those funds,
(i) which we refer to as the Available P&I Funds, and
(ii) which will be paid to the holders of all the series
_____ bonds, [other than the class ____ bonds], as
described under "--Payments--Priority of Payments" below.
INTEREST RESERVE ACCOUNT
The bond trustee must maintain an account in which it will hold those
interest reserve amounts described in the next paragraph with respect to those
pledged mortgage loans that accrue interest on an actual/360 basis. That
interest reserve account must be maintained in a manner and with a depository
that satisfies rating agency standards for similar securitizations as the one
involving the offered bonds. Funds held in the bond trustee's interest reserve
account will remain uninvested.
During January, except in a leap year, and February of each calendar
year, beginning in ______, the bond trustee will, on or before the payment date
in that month, withdraw from its collection account and deposit in its interest
reserve account the interest reserve amounts with respect to those pledged
mortgage loans that accrue interest on an actual/360 basis and for which the
monthly debt service payment due in that month was either received or advanced.
That interest reserve amount for each of those mortgage loans will equal one
day's interest accrued at the related mortgage interest rate on the Stated
Principal Balance of that loan as of the end of the related collection period.
During March of each calendar year, beginning in ______, the bond
trustee will, on or before the payment date in that month, withdraw from its
interest reserve account and deposit in its collection account any and all
interest reserve amounts then on deposit in the interest reserve account with
respect to those pledged mortgage loans that accrue interest on an actual/360
basis. All interest reserve amounts that are so transferred from the interest
reserve account to the collection account will be included in the Available P&I
Funds for the payment date during the month of transfer.
S-104
<PAGE>
PAYMENTS
GENERAL. On each payment date, the bond trustee will, subject to the
available funds, make all payments required to be made on the series ______
bonds on that date to the holders of record as of the close of business on the
last business day of the calendar month preceding the month in which those
payments are to occur. The final payment of principal and/or interest on any
offered bond, however, will be made only upon presentation and surrender of that
bond at the location to be specified in a notice of the pendency of that final
payment.
In order for a series ______ bondholder to receive payments by wire
transfer on and after any particular payment date, that bondholder must provide
the bond trustee with written wiring instructions no later than the last day of
the calendar month preceding the month in which that payment date occurs.
Otherwise, that bondholder will receive its payments by check mailed to it.
Cede & Co. will be the registered holder of your offered bonds, and you
will receive payments on your offered bonds through DTC and its participating
organizations, until physical securities are issued to the actual beneficial
owners. See "--Registration and Denominations" above.
PAYMENTS OF INTEREST. All of the classes of the series ______ bonds
will bear interest, except for the R-I, R-II and R-III classes.
With respect to each interest-bearing class of the series _______
bonds, that interest will accrue during each interest accrual period based
upon--
- the interest rate for that class and the related payment date,
- the total principal balance or notional amount, as the case may
be, of that class outstanding immediately prior to the related
payment date, and
- the assumption that each year consists of twelve 30-day months.
On each payment date, subject to the Available P&I Funds for that date
and the priorities of payment described under "--Payments--Priority of Payments"
below, the holders of each class of interest-bearing class of the series ______
bonds will be entitled to receive--
- the total amount of interest accrued during the related interest
accrual period with respect to that class of bonds, reduced by
- the portion of any Net Aggregate Prepayment Interest Shortfall
for that payment date that is allocable to that class of bonds.
If the holders of any interest-bearing class of the series _______
bonds do not receive all of the interest to which they are entitled on any
payment date, then they will continue to be entitled to receive the unpaid
portion of that interest on future payment dates, subject to the Available P&I
Funds for those future payment dates and the priorities of payment described
under "--Payments--Priority of Payments" below.
S-105
<PAGE>
The portion of any Net Aggregate Prepayment Interest Shortfall for any
payment date that is allocable to any particular interest-bearing class of the
series _______ bonds will equal the product of--
- the total amount of interest accrued during the related interest
accrual period with respect to that class of bonds, multiplied by
- a fraction, the numerator of which is the total amount of
interest accrued during the related interest accrual period with
respect to that class of bonds, and the denominator of which is
the total amount of interest accrued during the related interest
accrual period with respect to all of the interest-bearing
classes of the series _______ bonds.
CALCULATION OF INTEREST RATES.
GENERAL. The interest rate for each class of the series _______ bonds,
other than the class X bonds, will be [fixed] at the rate per annum set forth
with respect to each of those classes in the tables on pages S-______.
The interest rate applicable to the class X bonds for each payment date
will equal the excess, if any, of--
- the Weighted Average Mortgage Collateral Pass-Through Rate for
that payment date, over
- the weighted average of the interest rates for each of the other
interest-bearing classes of the series _______ bonds for that
payment date, weighted on the basis of the relative total
principal balances of other classes of series _______ bonds
outstanding immediately prior to that payment date.
S-106
<PAGE>
The calculation of the Weighted Average Mortgage Collateral
Pass-Through Rate will be unaffected by any change in the mortgage interest rate
for any mortgage loan, including in connection with any bankruptcy or insolvency
of the related borrower or any modification of that mortgage loan agreed to by
the master servicer or the special servicer.
The class R-I, R-II and R-III bonds will not be interest-bearing and,
therefore, will not have interest rates.
S-107
<PAGE>
PAYMENTS OF PRINCIPAL. Subject to the Available P&I Funds and the
priority of payments described under "--Payments--Priority of Payments" below,
the total amount of principal payable with respect to each class of the series
bonds, other than the class X, R-I, R-II and R-III bonds, on each payment date
will equal that class's allocable share of the Total Principal Payment Amount.
In general, the portion of the Total Principal Payment Amount that will
be allocated to the class A-1 and A-2 bonds on each payment date will equal:
- in the case of the class A-1 bonds, the lesser of--
1. the entire Total Principal Payment Amount for that payment
date, and
2. the total principal balance of the class A-1 bonds
immediately prior to that payment date; and
- in the case of the class A-2 bonds, the lesser of--
1. the entire Total Principal Payment Amount for that payment
date, reduced by any portion of that amount allocable to
the class A-1 bonds as described in the preceding bullet
point, and
2. the total principal balance of the class A-2 bonds
immediately prior to that payment date.
S-108
<PAGE>
However, if both of those classes are outstanding at a time when the
total principal balance of the class B, C, D, E, F, G. H. J, K, L, M and N bonds
has been reduced to zero as described under "--Reductions to Bond Principal
Balances in Connection With Realized Losses and Additional Trust Fund Expenses"
below, then the Total Principal Payment Amount for each payment date thereafter
will be allocable between those two classes on a PRO RATA basis in accordance
with their respective total principal balances immediately prior to that payment
date, in each case up to that total principal balance.
WHILE THE CLASS A-1 AND A-2 BONDS ARE OUTSTANDING, NO PORTION OF THE
TOTAL PRINCIPAL PAYMENT AMOUNT FOR ANY PAYMENT DATE WILL BE ALLOCATED TO ANY
OTHER CLASS OF SERIES _____ BONDS.
Following the retirement of the class A-1 and A-2 bonds, the Total
Principal Payment Amount for each payment date will be allocated to the
respective classes of series _____ bonds identified in the table below in and in
the order of priority set forth in that table, in each case up to the lesser
of--
- the portion of that Total Principal Payment Amount that remains
unallocated, and
- the total principal balance of the particular class immediately
prior to that payment date.
S-109
<PAGE>
ORDER OF ALLOCATION CLASS
------------------- -----
1 B
2 C
3 D
4 E
5 F
6 G
7 H
8 J
9 K
10 L
11 M
12 N
IN NO EVENT WILL THE HOLDERS OF ANY CLASS OF SERIES _____ BONDS LISTED
IN THE FOREGOING TABLE BE ENTITLED TO RECEIVE ANY PAYMENTS OF PRINCIPAL UNTIL
THE TOTAL PRINCIPAL BALANCE OF THE CLASS A-1 AND A-2 BONDS IS REDUCED TO ZERO.
FURTHERMORE, IN NO EVENT WILL THE HOLDERS OF ANY CLASS OF SERIES _____ BONDS
LISTED IN THE FOREGOING TABLE BE ENTITLED TO RECEIVE ANY PAYMENTS OF PRINCIPAL
UNTIL THE TOTAL PRINCIPAL BALANCE OF ALL OTHER CLASSES OF SERIES _____ BONDS, IF
ANY, LISTED ABOVE IT IN THE FOREGOING TABLE IS REDUCED TO ZERO.
REIMBURSEMENT AMOUNTS. As discussed under "--Reductions of Bond
Principal Balances in Connection with Realized Losses and Additional Trust
Estate Expenses" below, the total principal balance of any class of series
_______ bonds, other than the class X, R-I, R-II and R-III bonds, may be reduced
without a corresponding payment of principal. If that occurs with respect to any
of those classes of series _______ bonds, then, subject to Available P&I Funds
and the priority of payment described under "--Payments--Priority of Payments"
below, the holders of that class will be entitled to be reimbursed for the
amount of that reduction, WITHOUT INTEREST. References to the "loss
reimbursement amount" under "Payments-Priority of Payments" below mean, in the
case of any class of series _______ bonds, other than the class X, R-I, R-II and
R-III bonds, for any payment date, the total amount to which the holders of that
class are entitled as reimbursement for all previously unreimbursed reductions,
if any, made in the total principal balance of that class on all prior payment
dates as discussed under "--Reductions of Bond Principal Balances in Connection
with Realized Losses and Additional Trust Estate Expenses" below.
S-110
<PAGE>
PRIORITY OF PAYMENTS. On each payment date, the bond trustee will apply
the Available P&I Funds for that date to make the following payments in the
following order of priority, in each case to the extent of the remaining
Available P&I Funds:
<TABLE>
<CAPTION>
ORDER OF RECIPIENT
PAYMENT CLASS OR CLASSES TYPE AND AMOUNT OF PAYMENT
------- ---------------- --------------------------
<S> <C> <C>
1 A-1, A-2 and X Interest up to the total interest payable on those classes, PRO RATA based on
entitlement
2 A-1 and A-2 Principal up to the total principal payable on those classes, allocable as between
those classes as described immediately following this table
3 A-1 and A-2 Reimbursement up to the reimbursement amounts for those classes, PRO RATA based on
entitlement
4 B Interest up to the total interest payable on that class
5 B Principal up to the total principal payable on that class
6 B Reimbursement up to the loss reimbursement amount for that class
7 C Interest up to the total interest payable on that class
8 C Principal up to the total principal payable on that class
9 C Reimbursement up to the loss reimbursement amount for that class
10 D Interest up to the total interest payable on that class
11 D Principal up to the total principal payable on that class
12 D Reimbursement up to the loss reimbursement amount for that class
13 E Interest up to the total interest payable on that class
14 E Principal up to the total principal payable on that class
15 E Reimbursement up to the loss reimbursement amount for that class
16 F Interest up to the total interest payable on that class
17 F Principal up to the total principal payable on that class
18 F Reimbursement up to the loss reimbursement amount for that class
</TABLE>
S-111
<PAGE>
<TABLE>
<CAPTION>
ORDER OF RECIPIENT
PAYMENT CLASS OR CLASSES TYPE AND AMOUNT OF PAYMENT
------- ---------------- --------------------------
<S> <C> <C>
19 G Interest up to the total interest payable on that class
20 G Principal up to the total principal payable on that class
21 G Reimbursement up to the loss reimbursement amount for that class
22 H Interest up to the total interest payable on that class
23 H Principal up to the total principal payable on that class
24 H Reimbursement up to the loss reimbursement amount for that class
25 J Interest up to the total interest payable on that class
26 J Principal up to the total principal payable on that class
27 J Reimbursement up to the loss reimbursement amount for that class
29 K Interest up to the total interest payable on that class
30 K Principal up to the total principal payable on that class
31 K Reimbursement up to the loss reimbursement amount for that class
32 L Interest up to the total interest payable on that class
33 L Principal up to the total principal payable on that class
34 L Reimbursement up to the loss reimbursement amount for that class
35 M Interest up to the total interest payable on that class
36 M Principal up to the total principal payable on that class
37 M Reimbursement up to the loss reimbursement amount for that class
38 N Interest up to the total interest payable on that class
39 N Principal up to the total principal payable on that class
40 N Reimbursement up to the loss reimbursement amount for that class
43 R-I, R-II and R-III Any remaining Available P&I Funds
</TABLE>
S-112
<PAGE>
In general, no payments of principal will be made with respect to the
class A-2 bonds until the total principal balance of the class A-1 bonds is
reduced to zero. However, if both of those classes are outstanding at a time
when the total principal balance of the class B, C, D, E, F, G, H, J, K, L, M
and N bonds has been reduced to zero as described under "--Reductions to Bond
Principal Balances in Connection With Realized Losses and Additional Trust Fund
Expenses" below, payments of principal on the class A-1 bonds and the class A-2
bonds will be made on a PRO RATA basis in accordance with the respective total
principal balances of those classes then outstanding.
-----------------------
PAYMENTS OF PREPAYMENT PREMIUMS AND YIELD MAINTENANCE CHARGES. If any
prepayment consideration is collected during any particular collection period
with respect to any mortgage loan in the trust estate, regardless of whether
that prepayment consideration is calculated as a percentage of the amount
prepaid in accordance with a yield maintenance formula, then, on the payment
date corresponding to that collection period, the trustee will pay a portion of
that prepayment consideration to the holders of each class of series _______
bonds if any, that--
- senior to the class ____ bonds, and
- is entitled to payments of principal on that payment date,
up to an amount equal to the product of--
- the full amount of that prepayment consideration, net of workout
fees and liquidation fees payable from it, multiplied by
- a fraction, which in no event may be greater than 1.0, the
numerator of which is equal to the excess, if any, of the
interest rate for that class of bonds over the relevant discount
rate, and the denominator of which is equal to the excess, if
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any, of the mortgage interest rate of the prepaid mortgage loan
over the relevant discount rate, and further multiplied by
- a fraction, the numerator of which is equal to the amount of
principal payable to that class of bonds on that payment date,
and the denominator of which is the Total Principal Payment
Amount for that payment date.
The discount rate applicable to any class of series _______ bonds with
respect to any prepaid mortgage loan will equal the yield when compounded
monthly on the U.S. Treasury issue primary issue, with a maturity date closest
to the maturity date for the prepaid mortgage loan or the anticipated repayment
date, as applicable. In the event that there are two U.S. Treasury issues
- with the same coupon, the issue with the lower yield will be
utilized, and
- with maturity dates equally close to the maturity date for the
prepaid mortgage loan, the issue with the earliest maturity date
will be utilized.
The trustee will thereafter pay any remaining portion of the prepayment
consideration, net of workout fees and liquidation fees payable from it, to the
holders of the class X bonds. After the payment date on which the total
principal balance of all classes of series _____ bonds, other than the class X
bonds, senior to the class ____ bonds has been reduced to zero, the trustee will
pay any prepayment consideration, net of workout fees and liquidation fees
payable from it, collected on the pledged mortgage loans, entirely to the
holders of the class X bonds.
Neither we nor the underwriter makes any representation as to--
- the enforceability of the provision of any promissory note
evidencing one of the mortgage loans requiring the payment of a
prepayment premium or yield maintenance charge,
- or the collectability of any prepayment premium or yield
maintenance charge.
See "Description of the Mortgage Collateral--Terms and Conditions of the Pledged
Mortgage Loans--Prepayment Provisions" in this prospectus supplement.
PAYMENTS OF ADDITIONAL INTEREST. The class ____ bonds will entitle the
holders to all amounts, if any, applied as Post-ARD Additional Interest
collected on the ARD Loans.
TREATMENT OF REO PROPERTIES. Notwithstanding that any underlying real
property may be acquired as part of the trust estate through foreclosure, deed
in lieu of foreclosure or otherwise, the
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related mortgage loan will be treated as having remained outstanding, until the
REO Property is liquidated, for purposes of determining--
- payments on the series _______ bonds,
- allocations of Realized Losses and Additional Trust Estate
Expenses to the series _______ bonds, and
- the amount of all fees payable to the master servicer, the
special servicer and the bond trustee under the governing
documents.
In connection with the foregoing, that mortgage loan will be taken into account
when determining the Weighted Average Mortgage Collateral Pass-Through Rate and
the Total Principal Payment Amount for each payment date.
Operating revenues and other proceeds derived from an REO Property will
be applied--
- FIRST, to pay, or to reimburse the master servicer, the special
servicer and/or the bond trustee for the payment of, costs and
expenses incurred in connection with the operation and
disposition of the REO property, and
- THEREAFTER, as collections of principal, interest and other
amounts due on the related mortgage loan.
To the extent described under "--Advances of Delinquent Monthly Debt
Service Payments" below, the master servicer and the bond trustee will be
required to advances delinquent monthly debt service payments with respect to
each pledged mortgage loan as to which the corresponding underlying real
property has become an REO property, in all cases as if the mortgage loan had
remained outstanding.
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REDUCTIONS TO BOND PRINCIPAL BALANCES IN CONNECTION WITH REALIZED LOSSES AND
ADDITIONAL TRUST ESTATE EXPENSES
As a result of Realized Losses and Additional Trust Estate Expenses,
the total Stated Principal Balance of the mortgage collateral may decline below
the total principal balance of the series _______bonds. If this occurs following
the payments made to the bondholders on any payment date, then the respective
total principal balances of the following classes of the series ______ balance
bonds are to be successively reduced in the following order, until the total
principal balance of those bonds equals the total Stated Principal Balance of
the mortgage collateral that will be outstanding immediately following that
payment date.
<TABLE>
<CAPTION>
ORDER OF ALLOCATION CLASS
------------------- -----
<S> <C>
1 N
2 M
3 L
4 K
5 J
6 H
7 G
8 F
9 E
10 D
11 C
12 B
13 A-1 and A-2,
PRO RATA based on
total principal balance.
</TABLE>
The reductions in the total principal balances of the respective
classes of series _____ bonds with principal balances, as described in the
previous paragraph, will represent an allocation of the Realized Losses and/or
Additional Trust Estate Expenses that caused the particular mismatch in balances
between the pledged mortgage loans and those classes of bonds. A reduction of
this type in the total principal balance of any of the foregoing classes of
series _____ bonds will result in a corresponding reduction in the total
notional amount of the class X bonds.
The Realized Loss with respect to a liquidated mortgage loan, or
related REO Property, is an amount generally equal to the excess, if any, of:
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- the outstanding principal balance of the mortgage loan as of the
date of liquidation, together with?
1. all accrued and unpaid interest on the mortgage loan to but
not including the due date in the collection period in which
the liquidation occurred, exclusive, however, of any portion
of that interest that represents Default Interest or
Post-ARD Additional Interest, and
2. all related unreimbursed servicing advances and unpaid
liquidation expenses, over
- the total amount of liquidation proceeds, if any, recovered in
connection with the liquidation.
If any portion of the debt due under a mortgage loan is forgiven,
whether in connection with a modification, waiver or amendment granted or agreed
to by the master servicer or the special servicer or in connection with the
bankruptcy, insolvency or similar proceeding involving the related borrower, the
amount forgiven, other than Default Interest and Post-ARD Additional Interest,
also will be treated as a Realized Loss.
Some examples of Additional Trust Estate Expenses are:
- any special servicing fees, workout fees and liquidation fees
paid to the special servicer;
- any interest paid to the master servicer, the special servicer
and/or the bond trustee with respect to unreimbursed advances,
which interest payment is not covered out of late payment charges
and Default Interest actually collected on the related mortgage
loan in the trust estate;
- the cost of various opinions of counsel required or permitted to
be obtained in connection with the servicing of the pledged
mortgage loans and the administration of the trust estate;
- any unanticipated, non-mortgage loan specific expenses of the
trust estate, including--
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1. any reimbursements and indemnifications to the bond trustee
as described under "Description of the Governing
Documents--The Indenture--The Bond Trustee" in the
accompanying prospectus,
2. any reimbursements and indemnification to the master
servicer, the special servicer and the issuer as described
under "Description of the Governing Documents--The Servicing
and Administration Agreement(s)--Certain Matters Regarding
the Master Servicer, the Special Servicer, the Manager and
the Issuer" in the accompanying prospectus, and
3. any federal, state and local taxes, and tax-related
expenses, payable out of the trust estate as described under
"Federal Income Tax Consequences--REMICs--Prohibited
Transactions Tax and Other Taxes" in the accompanying
prospectus;
- rating agency fees, other than on-going surveillance fees, that
cannot be recovered from the borrower; and
- any amounts expended on behalf of the trust estate to remediate
an adverse environmental condition at any underlying real
property securing a defaulted mortgage loan as described under
"Servicing of the Mortgage Loans--Realization Upon Defaulted
Mortgage Loans" in this prospectus supplement.
ADVANCES OF DELINQUENT MONTHLY DEBT SERVICE PAYMENTS
The master servicer will be required to make, for each payment date, a
total amount of advances of principal and/or interest generally equal to all
monthly debt service payments, other than balloon payments, and assumed monthly
debt service payments, in each case net of related master servicing fees, that--
- were due or deemed due, as the case may be, with respect to the
mortgage loans during the related collection period, and
- were not paid by or on behalf of the respective borrowers or
otherwise collected as of the close of business on the last day
of the related collection period.
Notwithstanding the foregoing, if it is determined that an Appraisal
Reduction Amount exists with respect to any pledged mortgage loan in the trust
estate, then the master servicer will reduce the interest portion, but not the
principal portion, of each P&I advance that it must make with respect to that
mortgage loan during the period that the Appraisal Reduction Amount exists. The
interest portion of
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any P&I advance required to be made with respect to any mortgage loan as to
which there exists an Appraisal Reduction Amount, will equal the product of:
- the amount of the interest portion of that P&I advance that would
otherwise be required to be made for the subject payment date
without regard to this sentence and the prior sentence,
multiplied by
- a fraction, the numerator of which is equal to the Stated
Principal Balance of the mortgage loan, net of the Appraisal
Reduction Amount, and the denominator of which is equal to the
Stated Principal Balance of the mortgage loan.
With respect to any payment date, the master servicer will be required
to make P&I advances either out of its own funds or, subject to the replacement
thereof as and to the extent provided in the servicing and administration
agreement, funds held in the master servicer's custodial account that are not
required to be paid on the series _____ bonds on that payment date.
The bond trustee will be required to make any P&I advance that the
master servicer fails to make . See "--The Bond Trustee" below.
The master servicer and the bond trustee will each be entitled to
recover any P&I advance made by it, out of its own funds, from collections on
the mortgage loan as to which the advance was made. Neither the master servicer
nor the bond trustee will be obligated to make any P&I advance that, in its
judgment, would not ultimately be recoverable out of collections on the related
mortgage loan. If the master servicer or the bond trustee makes any P&I advance
that it subsequently determines, in its judgment, will not be recoverable out of
collections on the related mortgage loan, it may obtain reimbursement for that
advance, together with interest accrued on the advance as described in the
paragraph below, out of general collections on the mortgage loans and any REO
Properties in the trust estate on deposit in the master servicer's custodial
account from time to time. See "Description of the Bonds--Advances in Respect of
Delinquencies" in the accompanying prospectus and "Servicing of the Mortgage
Loans--Custodial Account" in this prospectus supplement.
The master servicer and the bond trustee will each be entitled to
receive interest on P&I advances made thereby out of its own funds. That
interest will accrue on the amount of each P&I advance, and compound monthly,
for so long as that advance is outstanding at an annual rate equal to the prime
rate as published in the "Money Rates" section of THE WALL STREET JOURNAL, as
that prime rate may change from time to time. Interest accrued with respect to
any P&I advance will be payable in the collection period in which that advance
is reimbursed--
- FIRST, out of Default Interest and late payment charges collected
on the related mortgage loan during that collection period, and
- THEN, if and to the extent that the Default Interest and late
charges referred to in clause FIRST are insufficient to cover the
advance interest, out of any amounts then on deposit in the
master servicer's custodial account.
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Any delay between a sub-servicer's receipt of a late collection of a
monthly debt service payment as to which a P&I advance was made and the
forwarding of that late collection to the master servicer, will increase the
amount of interest accrued and payable to the master servicer or the bond
trustee, as the case may be, on that P&I advance. To the extent not offset by
Default Interest and/or late payment charges accrued and actually collected,
interest accrued on outstanding P&I advances will result in a reduction in
amounts payable on the bonds.
A monthly debt service payment will be assumed to be due with respect
to:
- each pledged mortgage loan that is delinquent with respect to its
balloon payment beyond the end of the collection period in which
its maturity date occurs and as to which no arrangements have
been agreed to for the collection of the delinquent amounts,
including an extension of maturity; and
- each pledged mortgage loan as to which the corresponding
underlying real property has become an REO property.
The assumed monthly debt service payment deemed due on any mortgage loan
described in the prior sentence that is delinquent as to its balloon payment,
will equal, for its stated maturity date and for each successive due date that
it remains outstanding and part of the trust estate, the monthly debt service
payment that would have been due on the mortgage loan on the relevant date if
the related balloon payment had not come due and the mortgage loan had, instead,
continued to amortize and accrue interest according to its terms in effect prior
to that stated maturity date. The assumed monthly debt service payment deemed
due on any mortgage loan described in the second preceding sentence as to which
the related underlying real property has become an REO property, will equal, for
each due date that the REO property remains part of the trust estate, the
monthly debt service payment, or, in the case of a mortgage loan delinquent with
respect to its balloon payment, the assumed monthly debt service payment, due,
or deemed due, on the last due date prior to the acquisition of that REO
property. [Assumed monthly debt service payments for ARD Loans do not include
Post-ARD Additional Interest or accelerated amortization payments.]
ISSUER EVENTS OF DEFAULT
Each of the following constitute an issuer event of default with
respect to the series ______ bonds--
[SPECIFY EVENTS OF DEFAULT.]
RIGHTS UPON THE OCCURRENCE OF AN ISSUER EVENT OF DEFAULT
Upon the occurrence of an issuer event of default, the bond trustee
shall--
[SPECIFY ACTIONS TO BE TAKEN AND NOTICES TO BE GIVEN BY THE BOND
TRUSTEE.]
The bond trustee upon written request of the bondholders representing
more than ____% of the total principal amount of the series ______ bonds shall--
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[SPECIFY REMEDIES AVAILABLE TO THE BONDHOLDERS AND THE ACTIONS TO BE
TAKEN BY THE BOND TRUSTEE.]
If following an issuer event of default, the series ______ bonds have
been declared due and payable, the bond trustee may liquidate the mortgage
collateral, if--
[SPECIFY LIQUIDATION CONDITIONS AS WELL AS CIRCUMSTANCES UNDER WHICH
THE BOND TRUSTEE MAY ELECT TO MAINTAIN POSSESSION OF THE MORTGAGE COLLATERAL.]
REPORTS TO BONDHOLDERS; CERTAIN AVAILABLE INFORMATION
BONDHOLDER REPORTS. Based solely on information provided in monthly
reports prepared by the master servicer and the special servicer and delivered
to the bond trustee, the bond trustee will be required to deliver or otherwise
make available as described under "--Information Available Electronically"
below, on each payment date, to each registered holder of an offered bond and to
each beneficial owner of an offered bond held in book-entry form that is
identified to the reasonable satisfaction of the bond trustee:
- A Payment Date Statement setting forth, among other things:
[LIST INFORMATION TO BE DISCLOSED.]
- A CMSA Loan Periodic Update File and a CMSA Property File
setting forth information with respect to the pledged mortgage
loans and the underlying real properties, respectively.
- A Mortgage Collateral Data Update Report, which may be included
as part of the Payment Date Statement, containing information
regarding the pledged mortgage loans as of the end of the related
collection period.
The master servicer or the special servicer, as specified in the
servicing and administration agreement, is required to deliver to the bond
trustee monthly, and the bond trustee is required to make available as described
below under "--Information Available Electronically," a copy of each of the
following reports with respect to the pledged mortgage loans and the underlying
real properties:
- A Delinquent Loan Status Report containing substantially the
information set forth in Annex D to this prospectus supplement.
- An Historical Loan Modification Report containing substantially
the information set forth in Annex E to this prospectus
supplement.
- An Historical Liquidation Report containing substantially the
information set forth in Annex F to this prospectus supplement.
- An REO Status Report containing substantially the information
set forth in Annex G to this prospectus supplement.
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- A Servicer Watch List containing substantially the content set
forth in Annex H to this prospectus supplement.
- A Loan Payoff Notification Report setting forth, among other
things, for each mortgage loan where written notice of
anticipated payoff has been received as of the determination date
at least ______ business days prior to the preparation of the
report, the control number, the property name, the amount of
principal expected to be paid, the expected date of payment and
the estimated amount of the yield maintenance charge or
prepayment premium due.
- A Comparative Financial Status Report containing substantially
the information set forth in Annex K to this prospectus
supplement.
In addition, upon the request of any holder of a series ______ bond or,
to the extent identified to the reasonable satisfaction of the bond trustee,
beneficial owner of an offered bond, the bond trustee will be required to
request from the master servicer, and, upon receipt, make available to the
requesting party, during normal business hours at the offices of the bond
trustee, copies of the following reports required to be prepared and maintained
by the master servicer and/or special servicer:
- with respect to any underlying real property or REO property, an
Operating Statement Analysis Report containing substantially
the information set forth in Annex I to this prospectus
supplement; and
- with respect to any underlying real property or REO property, an
NOI Adjustment Worksheet containing substantially the content
set forth in Annex J to this prospectus supplement.
BOOK-ENTRY BONDS. If you hold your offered bonds in book-entry from
through DTC, you may obtain direct access to the monthly reports of the bond
trustee as if you were a bondholder, provided that you deliver a written
certification to the bond trustee confirming your beneficial ownership in the
offered bonds. Otherwise, until definitive securities are issued with respect to
your offered bonds, the information contained in those monthly reports will be
available to you only to the extent that it is made available through DTC and
the DTC participants or is available on the bond trustee's internet website.
Conveyance of notices and other communications by DTC to the DTC participants,
and by the DTC participants to beneficial owners of the offered bonds, will be
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time. The issuer, the master
servicer, the special servicer, the series _______ bond trustee and the bond
registrar are required to recognize as bondholders only those persons in whose
names the bonds are registered on the books and records of the bond registrar.
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INFORMATION AVAILABLE ELECTRONICALLY. The bond trustee will make
available each month, to any interested party, the Payment Date Statement, any
Mortgage Collateral Data Update Report, the CMSA Loan Periodic Update Files, the
CMSA Loan Setup Files, [SPECIFY OTHER REPORTS] via the bond trustee's internet
website, electronic bulletin board and fax-on-demand service. The bond trustee's
internet website will initially be located at "____________________".
The bond trustee's electronic bulletin board may be accessed by calling
(___) ___-____, and its fax-on- demand service may be accessed by calling (___)
___-____. For assistance with regard to the services described above, investors
may call (___) ___-____.
The bond trustee will make no representations or warranties as to the
accuracy or completeness of, and may disclaim responsibility for, any
information made available by the bond trustee for which it is not the original
source.
The bond trustee may require registration and the acceptance of a
disclaimer in connection with providing access to its electronic bulletin board
and internet website. The bond trustee shall not be liable for the dissemination
of information made in accordance with the servicing and administration
agreement.
OTHER INFORMATION. The servicing and administration agreement will
obligate the bond trustee to make available at its offices, during normal
business hours, upon reasonable advance written notice, for review by any holder
or beneficial owner of an offered bond or any person identified to the bond
trustee as a prospective transferee of an offered bond or any interest in an
offered bond, originals or copies of, among other things, the following items:
- the indenture, the deposit trust agreement and the servicing and
administration agreement, including exhibits, and any amendments
thereto;
- all monthly reports of the bond trustee delivered, or otherwise
electronically made available, to series _______ bondholders
since the date of initial issuance of the offered bonds;
- all officer's certificates delivered to the bond trustee by the
master servicer and/or the special servicer since the date of
initial issuance of the offered bonds, as described under
"Servicing of the Mortgage Loans--Evidence as to Compliance" in
this prospectus supplement;
- all accountant's reports delivered to the bond trustee with
respect to the master servicer and/or the special servicer since
the date of initial issuance of the bonds, as described under
"Servicing of the Mortgage Loans--Evidence as to Compliance" in
this prospectus supplement;
- the most recent inspection report with respect to each underlying
real property for a pledged mortgage loan prepared by the master
servicer or the special servicer and delivered to the bond
trustee as described under "Servicing of the Mortgage
Loans--Inspections; Collection of Operating Information" in this
prospectus supplement;
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- the most recent appraisal, if any, with respect to each
underlying real property for a pledged mortgage loan obtained by
the master servicer or the special servicer and delivered to the
bond trustee;
- the most recent quarterly and annual operating statement and rent
roll for each underlying real property for a pledged mortgage
loan and financial statements of the related borrower collected
by the master servicer or the special servicer and delivered to
the bond trustee as described under "Servicing of the Mortgage
Loans--Inspections; Collection of Operating Information" in this
prospectus supplement; and
- the mortgage files, including all documents, such as
modifications, waivers and amendments of the pledged mortgage
loans, that are to be added to the mortgage files from time to
time.
Copies of any and all of the foregoing items will be available from the
bond trustee upon request. However, the bond trustee will be permitted to
require payment of a sum sufficient to cover the reasonable costs and expenses
of providing the copies.
In connection with providing access to or copies of the items described
above, the bond trustee may require:
- in the case of a beneficial owner of an offered bond held in
book-entry form, a written confirmation executed by the
requesting person or entity, in a form reasonably acceptable to
the bond trustee, generally to the effect that the person or
entity is a beneficial owner of offered bonds and will keep the
information confidential; and
- in the case of a prospective purchaser of an offered bond or
any interest in an offered bond, confirmation executed by the
requesting person or entity, in a form reasonably acceptable to
the bond trustee, generally to the effect that the person or
entity is a prospective purchaser of offered bonds or an
interest in offered bonds, is requesting the information for use
in evaluating a possible investment in the offered bonds and will
otherwise keep the information confidential.
Registered holders of the offered bonds will be deemed to have agreed to keep
the information described above confidential by the acceptance of their bonds.
VOTING RIGHTS
The voting rights for the series ______ bonds will be allocated as
follows: [SPECIFY ALLOCATION]. Voting rights allocated to a class of
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series _______ bondholders will be allocated among those bondholders in
proportion to their respective percentage interests in that class.
OPTIONAL REDEMPTION
The issuer may, at its option, redeem any class of offered bonds, in
whole but not in part, on any payment date, if--
1. the then total principal balance of that class of bonds is less
than ____% of the initial total principal balance of that class,
and
2. no event of default has occurred and is continuing under the
indenture.
The redemption price will be equal to 100% of the unpaid total
principal balance of the offered bonds to be redeemed, plus any accrued and
unpaid interest due on those bonds. No yield maintenance amount will be payable
in connection with an option redemption. See Yield and Maturity Considerations
in this prospectus supplement.
Notice of any optional redemption must be mailed by the issuer or the
bond trustee at least ______ days prior to the date set for optional redemption.
[PROVIDE DESCRIPTION OF ANY SPECIAL OR MANDATORY REDEMPTION.]
THE BOND TRUSTEE
[INSERT DESCRIPTION OF THE BOND TRUSTEE.]
The bond trustee will be entitled to a monthly fee for its services,
which fee will accrue on a 30/360 basis at ____% per annum on the Stated
Principal Balance outstanding from time to time of the mortgage collateral and
other assets of the mortgage collateral. The bond trustee fee is payable out of
the mortgage collateral.
See also "Description of the Governing Documents--The Bond Trustee" in
the accompanying prospectus.
THE ISSUER
LB Commercial Mortgage Trust _________ is an owner trust formed by us
under the laws of the State of ________________, under the deposit trust
agreement. We will initially hold 100% of the beneficial ownership interests in
the issuer, but we may transfer some or all of our ownership interests to one or
more other persons or entities.
The issuer will not have any activities other than:
- acquiring, holding and, in accordance with the indenture,
pledging the mortgage collateral and other assets of the trust
estate to the bond trustee;
- issuing the series ______ bonds and the ownership certificates;
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- making payments on the series ______ bonds and the ownership
certificates; and
- taking any action necessary to accomplish the foregoing.
The issuer's principal offices are located at ________________________.
Its telephone number is ____________________.
THE OWNER TRUSTEE
___________________________________ is the owner trustee under the
deposit trust agreement. Its principal trust offices are located at
___________________________________. Its telephone number is
____________________________.
The owner trustee will be paid a fee of $__________ as compensation for
the performance of its duties under the deposit trust agreement.
___________________________ will be responsible for payment of the owner trustee
fee.
YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
GENERAL. The yield on any offered bond will depend on:
(a) the price at which the bond is purchased by an investor, and
(b) the rate, timing and amount of payments on the bond.
The rate, timing and amount of payments on any offered bond will in
turn depend on, among other things,
- the interest rate for the bond,
- the rate and timing of principal payments, including principal
prepayments, and other principal collections on the pledged
mortgage loans and the extent to which those amounts are to be
applied or otherwise result in reduction of the principal balance
or notional amount of the bond,
- the rate, timing and severity of Realized Losses and Additional
Trust Estate Expenses and the extent to which those losses and
expenses result in the reduction of the principal balance or
notional amount of the bond, and
- the timing and severity of any Net Aggregate Prepayment Interest
Shortfalls and the extent to which those shortfalls result in the
reduction of the interest payments on the bond.
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INTEREST RATES. The interest rate for each interest-bearing class of
the series _____ bonds is [fixed]. However, the interest rate applicable to the
class X bonds will be variable and will be calculated based in part on the
Weighted Average Mortgage Collateral Pass-Through Rate from time to time.
Accordingly, the yield on the class X bonds will be sensitive to changes in the
relative composition of the mortgage collateral as a result of scheduled
amortization, voluntary prepayments and liquidations of pledged mortgage loans
following default. In addition, the interest rate for the class X bonds will
vary with changes in the relative sizes of the total principal balances of the
respective classes of the series _____ bonds. The Weighted Average Mortgage
Collateral Pass-Through Rate and the interest rate for the class X bonds will
not be affected by modifications, waivers and amendments with respect to the
mortgage loans.
See "Description of the Offered Bonds--Payments--Calculation of
Interest Rates" and "Description of the Mortgage Collateral" in this prospectus
supplement and "--Rate and Timing of Principal Payments" below.
RATE AND TIMING OF PRINCIPAL PAYMENTS. The yield to maturity on the
class X bonds will be extremely sensitive to, and the yield to maturity on any
other offered bonds purchased at a discount or a premium will be affected by,
the rate and timing of principal payments made in reduction of the principal
balances or notional amounts of the series ______ bonds. In turn, the rate and
timing of principal payments that are paid or otherwise result in reduction of
the total principal balance or notional amount, as the case may be, of any
offered bond will be directly related to the rate and timing of principal
payments on or with respect to the pledged mortgage loans. Finally, the rate and
timing of principal payments on or with respect to the mortgage loans will be
affected by their amortization schedules, the dates on which balloon payments
are due and the rate and timing of principal prepayments and other unscheduled
collections on them, including for this purpose, collections made in connection
with liquidations of mortgage loans due to defaults, casualties or condemnations
affecting the underlying real properties, or purchases or other removals of
pledged mortgage loans from the trust estate.
Prepayments and other early liquidations of the pledged mortgage loans
will result in payments on the series ______ bonds of amounts that would
otherwise be paid over the remaining terms of the mortgage loans. This will tend
to shorten the weighted average lives of those series ____ of bonds with
principal balances. Defaults on the pledge mortgage loans, particularly at or
near their maturity dates, may result in significant delays in payments of
principal on the mortgage loans and, accordingly, on the series ______ bonds,
while work-outs are negotiated or foreclosures are completed. These delays will
tend to lengthen the weighted average lives of those bonds. See "Servicing of
The Mortgage Loans--Modifications, Waivers, Amendment and Consent" in this
prospectus supplement. In addition, the ability of a borrower under an ARD Loan,
to repay that loan on the related anticipated repayment date will generally
depend on its ability to either refinance the mortgage loan or sell the related
underlying real property. Also, a borrower may have little incentive to repay
its mortgage loan on the related anticipated repayment date if then prevailing
interest rates are relatively high. Accordingly, there can be no assurance that
any ARD Loan in the trust estate will be paid in full on its anticipated
repayment date.
The extent to which the yield to maturity on any offered bond may vary
from the anticipated yield will depend upon the degree to which the bond is
purchased at a discount or premium and when,
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and to what degree, payments of principal on the pledged mortgage loans are in
turn paid or otherwise result in a reduction of the principal balance or
notional amount of the bond. If you purchase your offered bonds at a discount,
you should consider the risk that a slower than anticipated rate of principal
payments on the pledge mortgage loans could result in an actual yield to you
that is lower than your anticipated yield. If you purchase class X bonds, or if
you purchase any other offered bonds at a premium, you should consider the risk
that a faster than anticipated rate of principal payments on the pledged
mortgage loans could result in an actual yield to you that is lower than your
anticipated yield.
If you are contemplating an investment in the class X bonds, you should
fully consider the risk that an extremely rapid rate of principal payments on
the pledged mortgage loans could result in your failure to recoup fully your
initial investment.
Because the rate of principal payments on or with respect to the
mortgage loans will depend on future events and a variety of factors, no
assurance can be given as to the rate or the rate of principal prepayments in
particular. We are not aware of any relevant publicly available or authoritative
statistics with respect to the historical prepayment experience of a large group
of real estate loans comparable to those in the trust estate.
Even if they are available and payable on your offered bonds,
prepayment premiums and yield maintenance charges may not be sufficient to
offset fully any loss in yield on your offered bonds attributable to the related
prepayments of the pledged mortgage loans.
DELINQUENCIES AND DEFAULTS ON THE MORTGAGE LOANS. The rate and timing
of delinquencies and defaults on the pledged mortgage loans will affect the
amount of payments on your offered bonds, the yield to maturity of your offered
bonds, the rate of principal payments on your offered bonds and the weighted
average life of your offered bonds. Delinquencies on the pledged mortgage loans,
unless covered by P&I advances, may result in shortfalls in payments of interest
and/or principal on your offered bonds for the current month. Although any
shortfalls in payments of interest may be made up on future payment dates, no
interest would accrue on those shortfalls. Thus, any shortfalls in payments of
interest would adversely affect the yield to maturity of your offered bonds.
If--
- you calculate the anticipated yield to maturity for your offered
bonds based on an assumed rate of default and amount of losses on
the pledged mortgage loans that is lower than the default rate
and amount of losses actually experienced, and
- the additional losses result in a reduction of the total payments
on or the total principal balance or notional amount of your
offered bonds,
then your actual yield to maturity will be lower than you calculated and could,
under some scenarios, be negative.
The timing of any loss on a liquidated mortgage loan that results in a
reduction of the total payments on or the total principal balance or notional
amount of your offered bonds will also affect your actual yield to maturity,
even if the rate of defaults and severity of losses are consistent with your
expectations. In general, the earlier your loss occurs, the greater the effect
on your yield to maturity.
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Even if losses on the pledged mortgage loans do not result in a
reduction of the total payments on or the total principal balance or notional
amount of your offered bonds, the losses may still affect the timing of payments
on, and the weighted average life and yield to maturity of, your offered bonds.
CERTAIN RELEVANT FACTORS. The following factors, among others, will
affect the rate and timing of principal payments and defaults and the severity
of losses on or with respect to the pledged mortgage loans in the trust estate:
- prevailing interest rates;
- the terms of the mortgage loans, including provisions that
require the payment of prepayment premiums and yield maintenance
charges, provisions that impose prepayment lock-out periods and
amortization terms that require balloon payments;
- the demographics and relative economic vitality of the areas in
which the underlying real properties are located;
- the general supply and demand for commercial and multifamily
rental space of the type available at the underlying real
properties in the areas in which the underlying real properties
are located;
- the quality of management of the underlying real properties;
- the servicing of the mortgage loans;
- possible changes in tax laws; and
- other opportunities for investment.
See "Risk Factors--Risks Related to the Pledged Mortgage Loans",
"Description of the Mortgage Collateral" and "Servicing of the Mortgage Loans"
in this prospectus supplement and "Description of the Governing Documents" and
"Yield and Maturity Considerations--Yield and Prepayment Considerations" in the
accompanying prospectus.
The rate of prepayment on the pledged mortgage loans in the trust
estate is likely to be affected by prevailing market interest rates for mortgage
loans of a comparable type, term and risk level. When the prevailing market
interest rate is below the annual rate at which a mortgage loan accrues
interest, the related borrower may have an increased incentive to refinance the
mortgage loan. Conversely, to the extent prevailing market interest rates exceed
the annual rate at which a mortgage loan accrues interest, the related borrower
may be less likely to voluntarily prepay the mortgage loan. Assuming prevailing
market interest rates exceed the revised mortgage interest rate at which an ARD
Loan accrues interest following its anticipated repayment date, the primary
incentive for the related borrower to prepay the mortgage loan on or before its
anticipated repayment date is to give the borrower access to excess cash flow,
all of which, net of the minimum required debt service, approved property
expenses and any required reserves, must be applied to pay down principal of the
mortgage loan. Accordingly, there can be no assurance that any ARD Loan in the
trust will be prepaid on or before its anticipated repayment date or on any
other date prior to maturity.
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Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell their
underlying real properties in order to realize their equity in those properties,
to meet cash flow needs or to make other investments. In addition, some
underlying borrowers may be motivated by federal and state tax laws, which are
subject to change, to sell their underlying real properties prior to the
exhaustion of tax depreciation benefits.
A number of the underlying borrowers are limited or general
partnerships. The bankruptcy of the general partner in a partnership may result
in the dissolution of the partnership. The dissolution of a borrower
partnership, the winding-up of its affairs and the distribution of its assets
could result in an acceleration of its payment obligations under the related
mortgage loan.
We make no representation or warranty regarding:
- the particular factors that will affect the rate and timing of
prepayments and defaults on the pledged mortgage loans;
- the relative importance of those factors;
- the percentage of the total principal balance of the pledged
mortgage loans that will be prepaid or as to which a default will
have occurred as of any particular date; or
- the overall rate of prepayment or default on the pledged mortgage
loans.
UNPAID INTEREST. If the portion of the Available P&I Funds payable with
respect to interest on any class of offered bonds on any payment date is less
than the total amount of interest then payable for the class, the shortfall will
be payable to the holders of those bonds on subsequent payment dates, subject to
the Available P&I Funds on those subsequent payment dates and the priority of
payments described under "Description of the Offered Bonds--Payments--Priority
of Payments" in this prospectus supplement. That shortfall will not bear
interest, however, and will therefore negatively affect the yield to maturity of
that class of offered bonds for so long as it is outstanding.
DELAY IN PAYMENTS. Because monthly payments will not be made on the
bonds until several days after the due dates for the mortgage loans during the
related collection period, your effective yield will be lower than the yield
that would otherwise be produced by your interest rate and purchase price,
assuming that price did not account for a delay.
YIELD SENSITIVITY
The tables on Annex C-1 hereto show the pre-tax corporate bond
equivalent or CBE yield to maturity, with respect to each class of offered
bonds, and the modified duration, weighted average life, first payment date on
which principal is to be paid and final payment date on which principal is to be
paid with respect to each class of offered bonds other than the class X bonds.
We prepared those tables using the Modeling Assumptions. Where applicable, they
also show the specified assumed purchase prices, which prices do not include
accrued interest. Assumed purchase prices are expressed in 32nds as a percentage
of the initial total principal
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balance or notional amount of each class of offered bonds. For example, ______
means ______%.
We calculate the yields set forth in the tables on Annex C-1 by--
- determining the monthly discount rates which, when applied to the
assumed stream of cash flows to be paid on each class of offered
bonds, would cause the discounted present value of that assumed
stream of cash flows to equal the assumed purchase prices, plus
accrued interest from and including the cut-off date to but
excluding the assumed settlement date specified as part of the
offered bonds, and
- converting those monthly rates to semi-annual corporate bond
equivalent rates.
That calculation does not take into account variations that may occur in the
interest rates at which investors may be able to reinvest funds received by them
as payments on the offered bonds and, consequently, does not purport to reflect
the return on any investment in the offered bonds when those reinvestment rates
are considered.
For purposes of the tables on Annex C-1, modified duration has been
calculated using the modified Macaulay Duration as specified in the "PSA
Standard Formulas". The Macaulay Duration is calculated as the present value
weighted average time to receive future payments of principal and interest, and
the PSA Standard Formula modified duration is calculated by dividing the
Macaulay Duration by the appropriate semi-annual compounding factor. The
duration of a security may be calculated according to various methodologies.
Accordingly, no representation is made by us or any other person that the
modified duration approach used in this prospectus supplement is appropriate.
Duration, like yield, will be affected by the prepayment rate of the pleaded
mortgage loans and extensions with respect to balloon payments that actually
occur during the life of the class A-1, class A-2, class B, class C, class D,
class E and class F bonds and by the actual performance of the pledged mortgage
loans, all of which may differ, and may differ significantly, from the
assumptions used in preparing those tables.
Prepayments on mortgage loans may be measured by a prepayment standard
or model. The model used in this prospectus supplement is the Constant
Prepayment Rate or CPR model. The CPR model represents an assumed constant
annual rate of prepayment each month, expressed as a per annum percentage of the
then outstanding principal balance of the subject mortgage loan(s).
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The characteristics of the pledge mortgage loans in the trust estate
will differ in some respects from those assumed in preparing the tables on Annex
C-1. Those tables are presented for illustrative purposes only. Thus, neither
the mortgage collateral nor any mortgage loan will prepay at any constant rate,
and it is unlikely that the pledge mortgage loans will prepay in a manner
consistent with any designated scenario for the tables on Annex C-1. In
addition, there can be no assurance that--
- the pledged mortgage loans will prepay at any particular rate,
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- the pledged mortgage loans will not prepay, involuntarily or
otherwise, during lockout periods, yield maintenance periods
and/or declining premium periods,
- the ARD Loans in the trust estate will be paid in full on their
respective anticipated repayment dates,
- the actual pre-tax yields on, or any other payment
characteristics of, any class of offered bonds will correspond to
any of the information shown in the tables on Annex C-1, or
- the total purchase prices of the offered bonds will be as
assumed.
You must make your own decision as to the appropriate assumptions,
including prepayment assumptions, to be used in deciding whether to purchase the
offered bonds.
WEIGHTED AVERAGE LIVES OF THE OFFERED BONDS
The weighted average life of any offered bond, other than a class X
bond, refers to the average amount of time that will elapse from the date of its
issuance until each dollar to be applied in reduction of the principal balance
of that bond is distributed to the investor. For purposes of this prospectus
supplement, the weighted average life of any offered bond, other than a class X
bond, is determined as follows:
- multiply the amount of each principal payment on the bond by the
number of years from the assumed settlement date to the related
payment date;
- sum the results; and
- divide the sum by the total amount of the reductions in the
principal balance of the bond.
Accordingly, the weighted average life of any offered bond, other than a class X
bond, will be influenced by, among other things, the rate at which principal of
the pledged mortgage loans is paid or otherwise collected or advanced and the
extent to which those payments, collections and/or advances of principal are in
turn applied in reduction of the principal balance of the class of principal to
which the bond belongs.
As described in this prospectus supplement, the principal payment
amount for each payment date will be payable first with respect to the class A-1
and/or class A-2 bonds until the total principal balances of those classes are
reduced to zero, and will thereafter be distributable entirely with respect to
the other classes of bonds with principal balances, sequentially based upon
their relative seniority, in each case until the related principal balance is
reduced to
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zero. As a consequence of the foregoing, the weighted average lives of the class
A-1 and class A-2 bonds may be shorter, and the weighted average lives of the
other classes of bonds with principal balances may be longer, than would
otherwise be the case if the principal payment amount for each payment date was
being paid on a PRO RATA basis among the respective classes of bonds with
principal balances.
The tables set forth in Annex C-2 show with respect to each class of
offered bonds, other than the class X bonds--
- the weighted average life of that class, and
- the percentage of the initial total principal balance of that
class that would be outstanding after each of the specified
dates, based upon each of the indicated levels of CPR and the
Modeling Assumptions.
We make no representation that--
- the pledged mortgage loans in the trust estate will prepay in
accordance with the assumptions set forth in this prospectus
supplement at any of the CPRs shown or at any other particular
prepayment rate,
- all the pledged mortgage loans in the trust estate will prepay in
accordance with the assumptions set forth in this prospectus
supplement at the same rate, or
- the pledged mortgage loans in the trust estate that are in a
lockout period, a yield maintenance period or declining premium
period will not prepay as a result of involuntary liquidations
upon default or otherwise.
USE OF PROCEEDS
Substantially all of the proceeds from the sale of the offered bonds
will be used by the issuer to purchase the pledge mortgage loans to be included
in the trust estate and to pay those expenses incurred in connection with the
issuance of the series ______ bonds.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
Upon the issuance of the offered bonds, _______________, our counsel,
will deliver its opinion generally to the effect that, assuming compliance with
the governing documents, and subject to any other assumptions set forth in the
opinion, REMIC I, REMIC II and REMIC III, respectively, will each qualify as a
REMIC under the Internal Revenue Code of 1986.
The assets of REMIC I will generally include--
- the pledged mortgage loans,
- any REO Properties acquired on behalf of the series _____
bondholders and the issuer,
- the master servicer's custodial account,
- the special servicer's REO account, and
- the bond trustee's collection account and interest reserve
account,
but will exclude any collections of Post-ARD Additional Interest on the ARD
Loans. For federal income tax purposes,
- the separate non-certificated regular interests in REMIC I will
be the regular interests in REMIC I and will be the assets of
REMIC II,
- the class R-I bonds will evidence the sole class of residual
interests in REMIC I,
- the separate non-certificated regular interests in REMIC II will
be the regular interests in REMIC II and will be the assets of
REMIC III,
- the class R-II bonds will evidence the sole class of residual
interests in REMIC II,
- the class A-1, A-2, X, B, C, D, E, F, G, H, J, K, L, M and N
bonds will evidence the regular interests in, and will generally
be treated as debt obligations of, REMIC III, and
- the class R-III bonds will evidence the sole class of residual
interests in REMIC III.
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DISCOUNT AND PREMIUM; PREPAYMENT CONSIDERATION
For federal income tax reporting purposes, it is anticipated that the
class ____ and class ____ bonds will be issued with more than a DE MINIMIS
amount of original issue discount. The class ____ bonds will be issued with a DE
MINIMIS amount of original issue discount. The other classes of offered bonds
will not be issued with original issue discount. When determining the rate of
accrual of market discount and premium, if any, for federal income tax purposes
the prepayment assumption used will be that subsequent to the date of any
determination:
- [the ARD Loans in the trust estate will be paid in full on their
respective anticipated repayment dates,]
- no mortgage loan will otherwise be prepaid prior to maturity, and
- there will be no extension of maturity for any mortgage loan in the
trust estate.
However, no representation is made as to the actual rate at which the pledged
mortgage loans will prepay, if at all. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Bonds" in the
accompanying prospectus.
The IRS has issued regulations under Sections 1271 to 1275 of the Code
of 1986 generally addressing the treatment of debt instruments issued with
original issue discount. You should be aware, however, that those regulations
and Section 1272(a)(6) of the Internal Revenue Code of 1986 do not adequately
address all issues relevant to, or are not applicable to, prepayable securities
such as the offered bonds. We recommend that you consult with your own tax
advisor concerning the tax treatment of your offered bonds.
If the method for computing original issue discount described in the
accompanying prospectus results in a negative amount for any period with respect
to any holder of offered bonds, the amount of original issue discount allocable
to that period would be zero. This is a possibility of particular relevance to a
holder of a class X bond. The holder would be permitted to offset the negative
amount only against future original issue discount, if any, attributable to his
or her bonds. Although the matter is not free from doubt, a holder of a class X
bond may be permitted to deduct a loss to the extent that his or her respective
remaining basis in the bond exceeds the maximum amount of future payments to
which the holder is entitled, assuming no further prepayments of the pledged
mortgage loans. Any loss might be treated as a capital loss.
Some classes of the offered bonds may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of these classes
of offered bonds will be treated as holding a bond with amortizable bond premium
will depend on the bondholder's purchase price and the payments remaining to be
made on the bond at the time of its acquisition by the bondholder. If you
acquire an interest in any class of offered bonds issued at a premium, you
should consider consulting your own tax advisor regarding the possibility of
making an election to amortize the premium. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Bonds--Premium" in the
accompanying prospectus.
Prepayment premiums and yield maintenance charges actually collected on
the pledged mortgage loans will be paid on the offered bonds as and to the
extent described in this prospectus
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supplement. It is not entirely clear under the Code when the amount of a
prepayment premium or yield maintenance charge should be taxed to the holder of
a class of offered bonds entitled to that amount. For federal income tax
reporting purposes, ________________ will report prepayment premiums or yield
maintenance charges as income to the holders of a class of offered bonds
entitled thereto only after the master servicer's actual receipt of those
amounts. The IRS may nevertheless seek to require that an assumed amount of
prepayment premiums and yield maintenance charges be included in payments
projected to be made on the offered bonds and that taxable income be reported
based on the projected constant yield to maturity of the offered bonds.
Therefore, the projected prepayment premiums and yield maintenance charges would
be included prior to their actual receipt by holders of the offered bonds. If
the projected prepayment premiums and yield maintenance charges were not
actually received, presumably the holder of an offered bond would be allowed to
claim a deduction or reduction in gross income at the time the unpaid prepayment
premiums and yield maintenance charges had been projected to be received.
Moreover, it appears that prepayment premiums and yield maintenance charges are
to be treated as ordinary income rather than capital gain. The correct
characterization of the income is not entirely clear. We recommend you consult
your own tax advisors concerning the treatment of prepayment premiums and yield
maintenance charges.
CONSTRUCTIVE SALES OF CLASS X BONDS
The Taxpayer Relief Act of 1997 added a provision to the Internal
Revenue Code of 1986 that requires the recognition of gain upon the constructive
sale of an appreciated financial position. A constructive sale of a financial
position may occur if a taxpayer enters into a transaction or series of
transactions that have the effect of substantially eliminating the taxpayer's
risk of loss and opportunity for gain with respect to the financial instrument.
Debt instruments that:
- entitle the holder to a specified principal amount,
- pay interest at a fixed or variable rate, and
- are not convertible into the stock of the issuer or a related party,
cannot be the subject of a constructive sale for this purpose. Accordingly, only
class X bonds, which do not have principal balances, could be subject to this
provision and only if a holder of those bonds engages in a constructive sale
transaction.
CHARACTERIZATION OF INVESTMENTS IN OFFERED BONDS
Except to the extent noted below, the offered bonds will be real estate
assets within the meaning of Section 856(c)(5)(B) of the Internal Revenue Code
of 1986 in the same proportion that the assets of the trust estate would be so
treated. In addition, interest, including original issue discount, if any, on
the offered bonds will be interest described in Section 856(c)(3)(B) of the
Internal Revenue Code of 1986 to the extent that the bonds are treated as real
estate assets within the meaning of Section 856(c)(5)(B) of the Internal Revenue
Code of 1986.
Most of the pledged mortgage loans to be included in trust estate are
not secured by real estate used for residential or some of the other purposes
prescribed in Section 7701(a)(19)(C) of the Internal Revenue Code of 1986.
Consequently, the offered bonds will be treated as assets qualifying
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under that section to only a limited extent. Accordingly, investment in the
offered bonds may not be suitable for a thrift institution seeking to be treated
as a domestic building and loan association under Section 7701(a)(19)(C) of the
Internal Revenue Code of 1986. The offered bonds will be treated as "qualified
mortgages" for another REMIC under Section 860G(a)(3)(C) of the Internal Revenue
Code of 1986 and permitted assets for a financial asset securitization
investment trust under Section 860L(c) of the Internal Revenue Code of 1986.
To the extent an offered bond represents ownership of an interest in a
mortgage loan that is secured in part by the related borrower's interest in a
bank account, that mortgage loan is not secured solely by real estate.
Therefore:
- a portion of that bond may not represent ownership of loans secured by
an interest in real property or other assets described in Section
7701(a)(19)(C) of the Internal Revenue Code of 1986;
- a portion of that bond may not represent ownership of real estate
assets under Section 856(c)(5)(B) of the Internal Revenue Code of
1986; and
- the interest on that bond may not constitute interest on obligations
secured by mortgages on real property within the meaning of Section
856(c)(3)(B) of the Internal Revenue Code of 1986.
See "Description of the Mortgage Collateral" in this prospectus supplement and
"Federal Income Tax Consequences--REMICs--Characterization of Investments in
REMIC Bonds" in the accompanying prospectus.
For further information regarding the federal income tax consequences
of investing in the offered bonds, see "Federal Income Tax Consequences" in the
accompanying prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended, and
the Internal Revenue Code of 1986 impose various requirements on--
- ERISA Plans, and
- persons that are fiduciaries with respect to ERISA Plans,
in connection with the investment of the assets of an ERISA Plan. For purposes
of this discussion, ERISA Plans may include individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts,
including as applicable, insurance company general accounts, in which other
ERISA Plans are invested.
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A fiduciary of any ERISA Plan should carefully review with its legal
advisors whether the purchase or holding of offered bonds could be or give rise
to a transaction that is prohibited or is not otherwise permitted either under
ERISA or Section 4975 of the Internal Revenue Code of 1986 or whether there
exists any statutory or administrative exemption applicable thereto. Certain
fiduciary and prohibited transaction issues arise only if the assets of the
trust estate are "plan assets" for purposes of Part 4 of Title I of ERISA and
Section 4975 of the Internal Revenue Code of 1986. Whether the assets of the
trust estate will be plan assets at any time will depend on a number of factors,
including the portion of any class of bonds that is held by benefit plan
investors within the meaning of U.S. Department of Labor Regulation Section
2510.3-101.
The U.S. Department of Labor has issued an individual prohibited
transaction exemption to the underwriter, identified as Prohibited Transaction
Exemption 91-14 . PTE 91-14 applies to bonds that are equity interests in a
trust or are debt issued by a REMIC or FASIT. Subject to the satisfaction of
those conditions set forth in PTE 91-14, PTE 91-14 generally exempts from the
application of the prohibited transaction provisions of Sections 406(a) and (b)
and 407(a) of ERISA, and the excise taxes imposed on these prohibited
transactions under Sections 4975(a) and (b) of the International Revenue Code of
1986, specified transactions relating to, among other things, the servicing and
operation of pools of real estate loans, such as the mortgage collateral, and
the purchase, sale and holding of bonds, which are equity interests in a trust
or debt issued by a REMIC or FASIT, evidencing interests in those pools, such as
the class A-1, A-2 and X bonds, that are underwritten by Exemption-Favored
Party.
PTE 91-14 sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of a class A-1, A-2 or X
bond to be eligible for exemptive relief under that exemption. The conditions
are as follows:
- FIRST, the acquisition of the bond by a plan must be on terms that are
at least as favorable to the ERISA Plan as they would be in an
arm's-length transaction with an unrelated party;
- SECOND, the rights and interests evidenced by that bond must not be
subordinated to the rights and interests evidenced by the other bonds;
- THIRD, at the time of its acquisition by the plan, that bond must be
rated in one of the three highest generic rating categories by
Moody's, Fitch, Standard & Poor's or Duff & Phelps;
- FOURTH, the bond trustee cannot be an affiliate of any other member of
the restricted group, which consists of-
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1. the bond trustee,
2. Exemption-Favored Parties,
3. us,
4. the issuer,
5. the master servicer,
6. the special servicer,
7. any sub-servicers,
8. the mortgage loan sellers,
9. each borrower, if any, with respect to pledged mortgage loans
constituting more than 5.0% of the total unamortized principal
balance of the initial mortgage collateral balance, and
10. any and all affiliates of any of the aforementioned persons;
- FIFTH, the following must be true-
1. the sum of all payments made to and retained by Exemption-Favored
Parties must represent not more than reasonable compensation for
underwriting the relevant class of bonds;
2. the sum of all payments made to and retained by us in connection
with the assignment of mortgage loans to the bond trustee must
represent not more than the fair market value of the obligations,
and
3. the sum of all payments made to and retained by the master
servicer, the special servicer and any sub-servicer must
represent not more than reasonable compensation for that person's
services under the servicing and administration agreement and
reimbursement of that person's reasonable expenses in connection
therewith; and
- SIXTH, the investing ERISA Plan must be an accredited investor as
defined in Rule 501(a)(1) of Regulation D under the Securities Act of
1933, as amended.
Because the class A-1, A-2 and X bonds are not subordinated to any
other class of bonds, the second general condition set forth above is satisfied
with respect to the class A-1, A-2 and X bonds. It is a condition of their
issuance that the class A-1, A-2 and X bonds be rated not lower than _____ by
_____________ and _____ by ______________. In addition, the initial bond trustee
is not an affiliate of any other member of the
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restricted group. Accordingly, as of the date of initial issuance of the bonds,
the third and fourth general conditions set forth above will be satisfied with
respect to the class A-1, A-2 and X bonds. A fiduciary of an ERISA Plan
contemplating the purchase of a class A-1, A-2 or X bond in the secondary market
must make its own determination that, at the time of the purchase, the bond
continues to satisfy the third and fourth general conditions set forth above. A
fiduciary of an ERISA Plan contemplating the purchase of a class A-1, A-2 or X
bond, whether in the initial issuance of the bond or in the secondary market,
must make its own determination that the first and fifth general conditions set
forth above will be satisfied with respect to the bond as of the date of the
purchase. An ERISA Plan's authorizing fiduciary will be deemed to make a
representation regarding satisfaction of the sixth general condition set forth
above in connection with the purchase of a class A-1, A-2 or X bond.
PTE 91-14 also requires that the trust estate meet the following
requirements:
- the assets of the trust estate must consist solely of assets of the
type that have been included in other investment pools;
- bonds evidencing interests in those other investment pools must have
been rated in one of the three highest generic categories of Moody's,
Fitch, Standard & Poor's or Duff & Phelps for at least one year prior
to the ERISA Plan's acquisition of a class A-1, A-2 or X bond; and
- bonds evidencing interests in those other investment pools must have
been purchased by investors other than ERISA Plans for at least one
year prior to any ERISA Plan's acquisition of a class A-1, A-2 or X
bond.
We believe that these requirements have been satisfied as of the date
of this prospectus supplement.
If the general conditions of PTE 91-14 are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA, as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Internal Revenue Code of 1986 by reason of Sections 4975(c)(1)(A) through (D) of
the Internal Revenue Code of 1986, in connection with--
- the direct or indirect sale, exchange or transfer of class A-1, A-2 or
X bonds acquired by an ERISA Plan upon initial issuance from us or an
Exemption-Favored Party when we are, or either mortgage loan seller,
the bond trustee, the issuer, the master servicer, the special
servicer or any sub-servicer, provider of credit support,
Exemption-Favored Party or mortgagor is, a Party in Interest with
respect to the investing ERISA Plan,
- the direct or indirect acquisition or disposition in the secondary
market of class A-1, A-2 or X bonds by an ERISA Plan, and
- the continued holding of class A-1, A-2 or X bonds by an ERISA Plan.
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However, no exemption is provided from the restrictions of Sections
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of a
class A-1, A-2 or X bond, where that acquisition or holding is--
1. on behalf of an ERISA Plan sponsored by any member of the
restricted group, and
2. by any person who has discretionary authority or renders
investment advice with respect to the assets of that ERISA Plan.
Moreover, if the general conditions of PTE 91-14, as well as other
conditions set forth in PTE 91-14, are satisfied, PTE 91-14 may also provide an
exemption from the restrictions imposed by Sections 406(b)(1) and (b)(2) of
ERISA and the taxes imposed by Section 4975(c)(1)(E) of the Internal Revenue
Code of 1986 in connection with--
- the direct or indirect sale, exchange or transfer of class A-1, A-2 or
X bonds in the initial issuance of those bonds between us or an
Exemption-Favored Party and an ERISA Plan when the person who has
discretionary authority or renders investment advice with respect to
the investment of the assets of the ERISA Plan in those bonds is--
1. a borrower with respect to 5.0% or less of the fair market value
of the mortgage loans, or
2. an affiliate of this person;
- the direct or indirect acquisition or disposition in the secondary
market of class A-1, A-2 or X bonds by an ERISA Plan, and
- the holding of class A-1, A-2 or X bonds by an ERISA Plan.
Further, if the general conditions of PTE 91-14, as well as other
conditions set forth in the Exemption, are satisfied, PTE 91-14 may provide an
exemption from the restrictions imposed by Sections 406(a), 406(b) and 407(a) of
ERISA, and the taxes imposed by Sections 4975(a) and (b) of the Internal Revenue
Code of 1986 by reason of Section 4975(c) of the Internal Revenue Code of 1986,
for transactions in connection with the servicing, management and operation of
the trust estate.
Lastly, if the general conditions of PTE 91-14 are satisfied, PTE 91-14
also may provide an exemption from the restrictions imposed by Sections 406(a)
and 407(a) of ERISA, and the taxes imposed by Section 4975(a) and (b) of the
Internal Revenue Code of 1986 by reason of Sections 4975(c)(1)(A) through (D) of
the Internal Revenue Code of 1986, if the restrictions are deemed to otherwise
apply merely because a person is deemed to be a Party in Interest with respect
to an investing plan by virtue of--
- providing services to the ERISA Plan, or
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- having a specified relationship to this person, solely as a result of
the ERISA Plan's ownership of class A-1, A-2 or X bonds.
Before purchasing a class A-1, A-2 or X bond, a fiduciary of an ERISA
Plan should itself confirm that:
- the class A-1, A-2 and X bonds are the type of instruments covered by
PTE 91-14, and
- the general and other conditions set forth in PTE 91-14 and the other
requirements set forth in PTE 91-14 would be satisfied at the time of
the purchase.
In addition to determining the availability of the exemptive relief
provided in PTE 91-14, a fiduciary of an ERISA Plan considering an investment in
class A-1, A-2 or X bonds should consider the availability of any other
prohibited transaction class exemptions. See "ERISA Considerations" in the
accompanying prospectus. There can be no assurance that any exemption described
in the accompanying prospectus will apply with respect to any particular
investment by an ERISA Plan in class A-1, A-2 or X bonds or, even if it were
deemed to apply, that it would apply to all prohibited transactions that may
occur in connection with the investment. A purchaser of class A-1, A-2 or X
bonds should be aware, however, that even if the conditions specified in one or
more class exemptions are satisfied, the scope of relief provided by a class
exemption may not cover all acts which might be construed as prohibited
transactions.
The characteristics of the class B, C, D, E and F bonds do not meet the
requirements of PTE 91-14. Accordingly, those offered bonds may not be acquired
by, on behalf of or with the assets of an ERISA Plan, except in the case of an
insurance company using funds in its general account, which may be able to rely
on Section III of Prohibited Transaction Class Exemption 95-60, which we discuss
below.
So long as the applicable conditions are satisfied, Section III of PTCE
95-60 exempts from the application of the prohibited transaction provisions of
Sections 406(a), 406(b) and 407(a) of ERISA and Section 4975 of the Internal
Revenue Code of 1986 transactions in connection with the servicing, management
and operation of the trust estate under circumstances where an insurance company
general account has an interest in the trust estate as a result of its
acquisition of bonds. If these conditions are met, insurance company general
accounts would be allowed to purchase some classes of the bonds, such as the
class B, C, D, E and F bonds, that do not meet the requirements of PTE 91-14
solely because they--
- are subordinated to other classes of the bonds, or
- have not received a rating at the time of the purchase in one of the
three highest rating categories from Moody's, Fitch, Standard & Poor's
or Duff & Phelps.
All other conditions of the PTE 91-14 would have to be satisfied in order for
PTCE 95-60 to be available. Before purchasing any class B, C, D, E or F bonds,
an
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insurance company general account seeking to rely on Section III of PTCE 95-60
should itself confirm that all applicable conditions and other requirements have
been satisfied.
A governmental plan as defined in Section 3(32) of ERISA is not subject
to Title I of ERISA or Section 4975 of the Internal Revenue Code of 1986.
However, a governmental plan may be subject to a federal, state or local law
which is, to a material extent, similar to the foregoing provisions of ERISA or
the Internal Revenue Code of 1986. A fiduciary of a governmental plan should
make its own determination as to the need for and the availability of any
exemptive relief under any similar law.
Any fiduciary of an ERISA Plan considering whether to purchase an
offered bond on behalf of that ERISA Plan should consult with its counsel
regarding the applicability of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Internal Revenue Code of 1986 to the
investment.
The sale of offered bonds to an ERISA Plan is in no way a
representation or warranty by us, the issuer or the underwriter that the
investment meets all relevant legal requirements with respect to investments by
ERISA Plans generally or by any particular ERISA Plan, or that the investment is
appropriate for ERISA Plans generally or for any particular ERISA Plan.
LEGAL INVESTMENT
[Upon issuance, the class A-1 and A-2 bonds will constitute mortgage
related securities for purposes of the Secondary Mortgage Market Enhancement Act
of 1984, as amended. However, in order to remain mortgage related securities,
the class A-1 and A-2 bonds must, among other things, continue to be rated in
one of the two highest rating categories by at least one nationally recognized
statistical rating organization. In addition, the class A-1 and A-2 bonds will
constitute mortgage related securities in part because they evidence interest in
notes secured by first mortgage liens on one or more real properties upon which
is located a residential, commercial or mixed residential and commercial
structure.
The remaining offered bonds will NOT be mortgage related securities
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended. As a result, the appropriate characterization of these remaining bonds
under various legal investment restrictions, and thus the ability of investors
subject to these restrictions to purchase these bonds, is subject to significant
interpretive uncertainties.]
Neither we, the issuer nor the underwriter makes any representation as
to the ability of particular investors to purchase the offered bonds under
applicable legal investment or other restrictions. 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 bonds--
- are legal investments for them, or
- are subject to investment, capital or other restrictions.
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The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, prudent investor provisions, percentage-of-assets limits 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 some investors,
including depository institutions, either to purchase the offered bonds or to
purchase offered bonds 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 bonds are legal investments
for the investors.
See "Legal Investment" in the accompanying prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement dated
_____________ between the issuer and the underwriter, the underwriter has agreed
to purchase from the issuer and the issuer has agreed to sell to the underwriter
____% of each class of the offered bonds. It is expected that delivery of the
offered bonds will be made to the underwriter in book-entry form through the
same day funds settlement system of DTC on or about ______________ against
payment therefor in immediately available funds.
The underwriting agreement provides that the obligation of the
underwriter to pay for and accept delivery of the offered bonds is subject to,
among other things:
- the receipt of various legal opinions; and
- the satisfaction of various conditions, including that--
1. no stop order suspending the effectiveness of our registration
statement shall be in effect, and
2. no proceedings for the purpose of obtaining a stop order shall be
pending before or threatened by the SEC.
The distribution of the offered bonds by the underwriter may be
accomplished 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 issuer from the sale of the offered bonds, before deducting expenses payable
by the issuer, will be approximately ____% of the total principal balance of the
offered bonds, plus
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accrued interest on all the offered bonds from _______________. The underwriter
may accomplish the transactions by selling the offered bonds to or through
dealers, and the dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the underwriter. The underwriter may
be deemed to have received compensation from the issuer, in connection with the
sale of the offered bonds, in the form of underwriting compensation. The
underwriter and any dealers that participate with the underwriter in the
distribution of the offered bonds may be deemed to be statutory underwriters and
any profit on the resale of the offered bonds positioned by them may be deemed
to be underwriting discounts and commissions under the Securities Act of 1933,
as amended.
The underwriting agreement provides that we will indemnify the
underwriter, and that under limited circumstances the underwriter will indemnify
us, against particular civil liabilities under the Securities Act of 1933, as
amended, relating to the disclosure in this prospectus supplement, the
accompanying prospectus or our registration statement.
We have also been advised by the underwriter that it presently intends
to make a market in the offered bonds. The underwriter has no obligation to do
so, however, and any market making may be discontinued at any time. There can be
no assurance that an active public market for the offered bonds will develop.
See "Risk Factors--Lack of Liquidity Will Impair Your Ability to Sell Your
Offered Bonds and May Have an Adverse Effect on the Market Value of Your Offered
Bonds" in the accompanying prospectus.
LEGAL MATTERS
Particular legal matters relating to the bonds will be passed upon for
the issuer and the underwriter by ________________________.
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RATINGS
It is a condition to their issuance that the respective classes of
offered bonds be rated as follows:
<TABLE>
<CAPTION>
CLASS [RATING AGENCY] [RATING AGENCY]
----- --------------- ---------------
<S> <C> <C>
Class A-1
Class A-2
Class B
Class C
Class D
Class E
Class F
Class X
</TABLE>
The ratings on the offered bonds address the likelihood of the timely
receipt by their holders of all payments of interest to which they are entitled
on each payment date and, except in the case of the class X bonds, the ultimate
receipt by their holders of all payments of principal to which they are entitled
on or before the rated final payment date. The ratings take into consideration
the credit quality of the mortgage collateral, structural and legal aspects
associated with the offered bonds, and the extent to which the payment stream
from the mortgage collateral is adequate to make payments of interest and/or
principal required under the offered bonds.
The ratings on the respective classes of offered bonds do not represent
any assessment of--
- the tax attributes of the offered bonds or of the trust estate,
- whether or to what extent prepayments of principal may be received on
the pledged mortgage loans,
- the likelihood or frequency of prepayments of principal on the pledged
mortgage loans,
- the degree to which the amount or frequency of prepayments of
principal on the pledge mortgage loans might differ from those
originally anticipated,
- whether or to what extent the interest payable on any class of offered
bonds may be reduced in connection with Net Aggregate Prepayment
Interest Shortfalls, and
- whether and to what extent prepayment premiums, yield maintenance
charges, Default Interest or Post-ARD Additional Interest will be
received.
Also, a security rating does not represent any assessment of the yield
to maturity that investors may experience or the possibility that the class X
bondholders might not fully recover their investment in the event of rapid
prepayments and/or other liquidations of the mortgage loans.
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In general, the ratings address credit risk and not prepayment risk. As
described in this prospectus supplement, the amounts payable with respect to the
class X bonds consist primarily of interest. Even if all the mortgage collateral
were to prepay in the initial month, with the result that the class X
bondholders receive only a single month's interest payment and, accordingly,
suffer a nearly complete loss of their investment, all amounts due to those
bondholders will nevertheless have been paid. This result would be consistent
with the respective ratings received on the class X bonds. The total notional
amount of the class X bonds is subject to reduction in connection with each
reduction in the total principal balance of any other interest-bearing class of
series _______ bonds, whether as a result of payments of principal or in
connection with Realized Losses and Additional Trust Estate Expenses. The
ratings of the class X bonds do not address the timing or magnitude of reduction
of the total notional amount of those bonds, but only the obligation to pay
interest timely on that total notional amount as so reduced from time to time.
There can be no assurance as to whether any rating agency not requested
to rate the offered bonds will nonetheless issue a rating to any class of
offered bonds and, if so, what the rating would be. A rating assigned to any
class of offered bonds by a rating agency that has not been requested by us to
do so may be lower than the rating assigned thereto by ___________ or
____________.
The ratings on the offered bonds 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 organization. Each security
rating should be evaluated independently of any other security rating. See
"Rating" in the accompanying prospectus.
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GLOSSARY
The following capitalized terms will have the respective meanings
assigned to them in this "Glossary" section whenever they are used in this
prospectus supplement, including in any of the annexes to this prospectus
supplement.
"ADDITIONAL TRUST FUND EXPENSE" means an expense of the trust estate
that
- arises out of a default on a mortgage loan or an otherwise
unanticipated event, and
- is not covered by a servicing advance or a corresponding collection
from the related borrower.
"ARD LOAN" means any mortgage loan in the trust estate having the
characteristics described in the first paragraph under "Description of the
Mortgage Collateral--Terms and Conditions of the Pledged Mortgage Loans--ARD
Loan" in this prospectus supplement.
"APPRAISAL REDUCTION AMOUNT" means, for any pledged mortgage loan in
the trust estate as to which an Appraisal Trigger Event has occurred, an amount
that:
- will be determined shortly following the later of the date on which
the relevant appraisal or other valuation is obtained or performed and
the date on which the relevant Appraisal Trigger Event occurred, and
- will equal the excess, if any, of "x" over "y" where--
1. "x" is equal to the sum of:
- the unpaid principal balance of the mortgage loan, net of any
related unreimbursed advances of principal;
- to the extent not previously advanced by or on behalf of the
master servicer or the bond trustee, all unpaid interest, other
than any Default Interest and Post-ARD Additional Interest,
accrued on the mortgage loan through the most recent due date
prior to the date of determination;
- all accrued but unpaid special servicing fees with respect to the
mortgage loan;
- all related unreimbursed advances made by or on behalf of the
master servicer, the special servicer or the bond trustee with
respect to the required appraisal loan, together with interest on
those advances; and
- all currently due and unpaid real estate taxes and assessments,
insurance premiums and, if applicable, ground rents with respect
to the
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related underlying real property, net of any escrow reserves held
by the master servicer or the special servicer which covers the
particular item and other related reserves; and
2. "y" is equal to 90% of the resulting appraised or estimated value
of the related underlying real property or REO Property, as that
appraised or estimated value may be reduced, to not less than
zero, by the amount of any obligations secured by liens on the
property that are prior to the lien of the mortgage loan.
If, however, the appraisal or other valuation referred to in the first
bullet point of this definition is not obtained or performed within __ days of
the Appraisal Trigger Event referred to in the first bullet point of this
definition, and no comparable appraisal or other valuation had been obtained or
performed during the ______-month period prior to that Appraisal Trigger Event,
then until the required appraisal or other valuation is obtained or performed,
the "Appraisal Reduction Amount" for the subject mortgage loan will equal
approximately ____% of the unpaid principal balance of that mortgage loan, net
of any related unreimbursed advances of principal. After receipt of the required
appraisal or other valuation, the special servicer will determine the Appraisal
Reduction Amount, if any, for the subject mortgage loan as described in the
first sentence of this definition.
"APPRAISAL TRIGGER EVENT" means, with respect to any pledged mortgage
loan in the trust, any of the following events:
- the mortgage loan has been modified by the special servicer in a
manner that--
1. affects the amount or timing of any monthly debt service payment
due on it, other than, or in addition to, bringing current
monthly debt service payments with respect to the mortgage loan,
2. except as expressly contemplated by the related loan documents,
results in a release of the lien of the mortgage on any material
portion of the related underlying real property without a
corresponding principal prepayment in an amount not less than the
fair market value, as is, of the property to be released, or
3. in the judgment of the special servicer, otherwise materially
impairs the security for the mortgage loan or reduces the
likelihood of timely payment of amounts due on that mortgage
loan;
- the related borrower fails to make any monthly debt service payment
with respect to the mortgage loan and the failure continues for _____
days;
- a receiver is appointed and continues in that capacity with respect to
the underlying real property securing the mortgage loan;
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- the related borrower becomes the subject of bankruptcy, insolvency or
similar proceedings; or
- the underlying real property securing the mortgage loan becomes an REO
Property.
- "AVAILABLE P&I FUNDS" means, with respect to any payment date, all
funds available in the bond trustee's collection account to pay principal and
interest on the series ________ bonds on that payment date.
- "CPR" means an assumed constant rate of prepayment each month,
which is expressed on a per annum basis, relative to the then outstanding
principal balance of a pool of mortgage loans for the life of those loans.
"DEFAULT INTEREST" means any interest that--
- accrues on a defaulted mortgage loan solely by reason of the subject
default, and
- is in excess of all interest at the related mortgage interest rate and
any Post-ARD Additional Interest accrued on the mortgage loan.
"ERISA PLAN" means any employee benefit plan, or other retirement plan,
arrangement or account, that is subject to the fiduciary responsibility
provisions of ERISA and Section 4975 of the Internal Revenue Code of 1986.
"EXEMPTION-FAVORED PARTY" means any of--
- the underwriter,
- any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with the
underwriter, and
- any member of the underwriting syndicate or selling group of which a
person described in the prior two bullet points is a manager or
co-manager with respect to those bonds.
- "FASIT" means a financial asset securitization trust, within the
mean of, and formed in accordance with, the Small Business Job Protection Act
of 1996 and Sections 860I through 860L of the Internal Revenue Code of 1986.
- "IRS" means the Internal Revenue Service.
"MODELING ASSUMPTIONS" means, collectively, the following assumptions
regarding the series ___ bonds and the pledged mortgage loans in the trust
estate:
- the mortgage loans have the characteristics set forth on Annex A-1 and
the initial mortgage collateral balance is approximately
$______________;
- the initial total principal balance or notional amount, as the case
may be, of each class of series ___ bonds is as described in this
prospectus supplement;
- the interest rate for each class of series ___ bonds is as described
in this prospectus supplement.
- there are no delinquencies or losses with respect to the mortgage
loans;
- there are no modifications, extensions, waivers or amendments
affecting the monthly debt service payments by borrowers on the
mortgage loans;
- there are no Appraisal Reduction Amounts with respect to the mortgage
loans;
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- there are no casualties or condemnations affecting the corresponding
underlying real properties;
- each of the mortgage loans provides monthly debt service payments to
be due on the __ day of each month and accrues interest on the
respective basis described in this prospectus supplement, which is
either a 30/360 basis or an actual/360 basis;
- all prepayments on the mortgage loans are assumed to be accompanied by
a full month's interest;
- there are no breaches of our representations and warranties regarding
the pledged mortgage loans;
- monthly debt service payments on the mortgage loans are timely
received on the ___ day of each month;
- no voluntary or involuntary prepayments are received as to any
mortgage loan during that mortgage loan's lockout period, yield
maintenance period or declining premium period, in each case if any;
- each ARD Loan is paid in full on its anticipated repayment date;
- except as otherwise assumed in the immediately preceding two bullet
points, prepayments are made on each of the mortgage loans at the
indicated CPRs set forth in the subject tables, without regard to any
limitations in those mortgage loans on partial voluntary principal
prepayments;
- no person or entity entitled thereto exercises its right of optional
termination described in this prospectus supplement under "Description
of the Offered Bonds--Termination";
- no mortgage loan is required to be repurchased by us;
- no prepayment premiums or yield maintenance charges are collected;
- there are no Additional Trust Fund Expenses;
- payments on the offered bonds are made on the _____ day of each month,
commencing in _____________; and
- the offered bonds are settled on ________________ .
"NET AGGREGATE PREPAYMENT INTEREST SHORTFALL" means, with respect to
any payment date, the excess, if any, of--
- the Prepayment Interest Shortfalls incurred with respect to the
mortgage collateral during the related collection period, over
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- the total payments made by the master servicer to cover those
Prepayment Interest Shortfalls.
"PARTY IN INTEREST" means any person that is a "party in interest"
within the meaning of ERISA or a "disqualified person" within the meaning of the
Internal Revenue Code of 1986.
"PERMITTED ENCUMBRANCES" means, with respect to any underlying real
property securing a pledged mortgage loan in the trust estate, any and all of
the following:
- the lien of current real property taxes, ground rents, water charges,
sewer rents and assessments not yet due and payable,
- covenants, conditions and restrictions, rights of way, easements and
other matters that are of public record and/or are referred to in the
related lender's title insurance policy or, if that policy has not yet
been issued, referred to in a pro forma title policy or a marked-up
commitment, none of which materially interferes with the security
intended to be provided by the related mortgage, deed of trust or
other similar security instrument, the current use of the property or
the current ability of the property to generate income sufficient to
service the related mortgage loan,
- exceptions and exclusions specifically referred to in the related
lender's title insurance policy or, if that policy has not yet been
issued, referred to in a pro forma title policy or marked-up
commitment, none of which materially interferes with the security
intended to be provided by the related mortgage, deed of trust or
similar security instrument, the current use of the property or the
current ability of the property to generate income sufficient to
service the related mortgage loan,
- other matters to which like properties are commonly subject, none of
which materially interferes with the security intended to be provided
by the related mortgage, deed of trust or similar security instrument,
the current use of the property or the current ability of the property
to generate income sufficient to service the related mortgage loan,
- the rights of tenants to remain, whether under ground leases or space
leases, at the property following a foreclosure or similar proceeding,
provided that those tenants are performing under their leases, and
- if the related mortgage loan is cross-collateralized with any other
mortgage loan, the lien of the mortgage, deed of trust or other
security instrument for that other mortgage loan.
"PERMITTED INVESTMENTS" means of U.S. government securities and other
investment grade obligations specified in the servicing and administration
agreement.
"POST-ARD ADDITIONAL INTEREST" means, with respect to any ARD Loan, the
additional interest accrued with respect to that mortgage loan as a result of
the marginal increase in the related mortgage interest rate upon passage of the
related anticipated repayment date, as this interest may compound in accordance
with the terms of that mortgage loan.
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"PREPAYMENT INTEREST EXCESS" means, with respect to any full or partial
prepayment of a pledged mortgage loan made by the related borrower during any
collection period after the due date for that loan, the amount of any interest
collected on that prepayment for the period following that due date, less the
amount of related master servicing fees payable from that interest collection,
and exclusive of any Default Interest and Post-ARD Additional Interest included
in that interest collection.
"PREPAYMENT INTEREST SHORTFALL" means, with respect to any full or
partial prepayment of a pledged mortgage loan made by the related borrower
during any collection period prior to the due date for that loan, the amount of
any uncollected interest that would have accrued on that prepayment through that
due date, less the amount of related master servicing fees that would have been
payable from that uncollected interest, and exclusive of any portion of that
uncollected interest that represents Default Interest or Post-ARD Additional
Interest.
"REALIZED LOSSES" mean losses on or with respect of the pledged
mortgage loans arising from the inability of the master servicer and/or the
special servicer to collect all amounts due and owing under the mortgage loans,
including by reason of the fraud or bankruptcy of a borrower or, to the extent
not covered by insurance, a casualty of any nature at a underlying real
property.
"REMIC" means a real estate mortgage investment conduit, within the
meaning of, and formed in accordance with, the Tax Reform Act of 1986 and
Sections 860A through 860G of the Internal Revenue Code of 1986.
"REO PROPERTY" means any underlying real property that is acquired by
the trust through foreclosure, deed-in-lieu of foreclosure or otherwise
following a default on the corresponding pledged mortgage loan.
"SEC" means the Securities and Exchange Commission.
"SERVICING STANDARD" means, with respect to either the master servicer
or the special servicer, to service and administer the pledged mortgage loans
and any real estate included in the trust estate for which that party is
responsible:
- with the same care, skill and diligence as is normal and usual in its
general mortgage servicing and asset management activities with
respect to comparable loans and real properties that either are part
of other third party portfolios, giving due consideration to customary
and usual standards of practice of prudent institutional commercial
lenders, or are held as part of its own portfolio, whichever servicing
procedures are of a higher standard;
- with a view to--
1. the timely collection of all monthly debt service payments under
those mortgage loans,
2. the full collection of all prepayment premiums and yield
maintenance charges that may become payable under those mortgage
loans, and
3. in the case of the special servicer, if a mortgage loan comes
into and continues in default and, in the judgment of the special
servicer, no satisfactory arrangements can be made for the
collection of the delinquent payments, including payments of
prepayment premiums and yield maintenance charges, the
maximization of the recovery on that defaulted
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mortgage loan to the series _____ bondholders, as a collective
whole, on a present value basis; and
- without regard to--
1. any known relationship that the master servicer or the special
servicer, as the case may be, or any of its affiliates may have
with any of the underlying borrowers or any other party to the
servicing and administration agreement,
2. the ownership of any series _____ bond by the master servicer or
the special servicer, as the case may be, or by any of its
affiliates,
3. the obligation of the master servicer or the special servicer, as
the case may be, to make advances,
4. the right of the master servicer or the special servicer, as the
case may be, or any of its affiliates to receive reimbursement of
costs, or the sufficiency of any compensation payable to it under
the servicing and administration agreement or with respect to any
particular transaction, and
5. the ownership, servicing or management by the master servicer or
the special servicer, as the case may be, or any of its
affiliates of any other loans or real properties not included in
or securing, as the case may be, the mortgage collateral, or the
right to service or manage for others any other loans or real
properties.
"SERVICING TRANSFER EVENT" means, with respect to any pledged mortgage
loan included in the trust estate, any of the following events:
1. the related borrower fails to make when due any monthly debt service
payment, including a balloon payment, or any other payment required
under the related promissory note or the related mortgage, and either
the failure actually continues, or the master servicer believes it
will continue, unremedied for _____ days;
2. the master servicer determines that a default in the making of a
monthly debt service payment, including a balloon payment, or any
other material payment required to be made under the related
promissory note or the related mortgage, is likely to occur within
_____ days and either--
- the default is likely to remain unremedied for at least _____
days, or
- the related borrower has requested a material modification of the
related mortgage loan;
3. the master servicer determines that a non-payment default has occurred
under the mortgage loan that may materially impair the value of the
corresponding underlying real property as security for the mortgage
loan and the default continues
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unremedied for the applicable cure period under the terms of the
mortgage loan or, if no cure period is specified, for _____ days;
4. various events of bankruptcy, insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings occur
with respect to the related borrower or the corresponding underlying
real property, or the related borrower takes various actions
indicating its bankruptcy, insolvency or inability to pay its
obligations; or
5. the master servicer receives notice of the commencement of foreclosure
or similar proceedings with respect to the corresponding underlying
real property.
A Servicing Transfer Event will cease to exist, if and when:
- with respect to the circumstances described in clause 1. of this
definition, the related borrower makes three consecutive full and
timely monthly debt service payments under the terms of the mortgage
loan, as those terms may be changed or modified in connection with a
bankruptcy or similar proceeding involving the related borrower or by
reason of a modification, waiver or amendment granted or agreed to by
the master servicer or the special servicer;
- with respect to the circumstances described in clauses 2. and 4. of
this definition, those circumstances cease to exist in the good faith,
reasonable judgment of the special servicer, but, with respect to any
bankruptcy or insolvency proceedings contemplated by clause 4., no
later than the entry of an order or decree dismissing the proceeding;
- with respect to the circumstances described in clause 3. of this
definition, the default is cured in the judgment of the special
servicer; and
- with respect to the circumstances described in clause 5. of this
definition, the proceedings are terminated.
"STATED PRINCIPAL BALANCE" means, for each mortgage loan in the trust
estate, an amount that:
- will initially equal its cut-off date principal balance; and
- will be permanently reduced on each subsequent payment date, to not
less than zero, by--
1. that portion, if any, of the Total Principal Payment Amount for
that payment date that is attributable to that mortgage loan, and
2. the principal portion of any Realized Loss incurred with respect
to that mortgage loan during the related collection period.
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However, the "Stated Principal Balance" of a mortgage loan will, in all
cases, be zero as of the payment date following the collection period in which
it is determined that all amounts ultimately collectible with respect to the
mortgage loan or any related REO Property have been received.
"TOTAL PRINCIPAL PAYMENT AMOUNT" means, for any payment date, an amount
equal to the total, without duplication, of the following:
- all payments of principal, including voluntary principal prepayments,
received on the pledged mortgage loans during the related collection
period, exclusive of any of those payments that represents a late
collection of principal for which an advance was previously made for a
prior payment date or that represents a monthly payment of principal
due on or before the cut-off date or on a due date subsequent to the
end of the related collection period;
- all monthly payments of principal received on the pledged mortgage
loans prior to, but that are due during, the related collection
period;
- all other collections, including liquidation proceeds, condemnation
proceeds, insurance proceeds and repurchase proceeds, that were
received on or with respect to any of the pledged mortgage loans or
any related REO Properties during the related collection period and
that were identified and applied by the master servicer as recoveries
of principal of the subject mortgage loan or, in the case of an REO
Property, of the related mortgage loan, in each case net of any
portion of the particular collection that represents a late collection
of principal due on or before the cut-off date or for which an advance
of principal was previously made for a prior payment date; and
- all advances of principal made with respect to the pledged mortgage
loans for that payment date.
"WEIGHTED AVERAGE MORTGAGE COLLATERAL PASS-THROUGH RATE" means, for
each payment date, the weighted average of the following annual rates with
respect to all of the mortgage loans in the trust, weighted on the basis of the
mortgage loans' respective Stated Principal Balances immediately prior to that
payment date:
- in the case of each mortgage loan that accrues interest on a 30/360
basis, an annual rate equal to--
1. the mortgage interest rate in effect for that mortgage loan as of
the cut-off date, minus
2. the sum of the related master servicing fee rate, plus ____% per
annum; and
- in the case of each mortgage loan that accrues interest on an
actual/360 basis, an annual rate generally equal to--
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1. a fraction, expressed as a percentage, the numerator of which is,
subject to adjustment as described in the paragraph following
subclause 2. below, the product 12 times the amount of interest
that accrued or would have accrued with respect to that mortgage
loan on an actual/360 basis during the related interest accrual
period, based on its Stated Principal Balance immediately
preceding that payment date and its mortgage interest rate in
effect as of the cut-off date, and the denominator of which is
the Stated Principal Balance of the mortgage loan immediately
prior to that payment date, minus
2. the sum of the related master servicing fee rate, plus ____% per
annum.
Notwithstanding the foregoing, if the subject payment date occurs
during January, except during a leap year, or February, then, in the case of any
particular mortgage loan that accrues interest on an actual/360 basis, the
amount of interest referred to in the numerator of the fraction described in
clause 1. of the second bullet point above will be decreased to reflect any
interest reserve amount with respect to that mortgage loan that is transferred
from the bond trustee's collection account to the bond trustee's interest
reserve account during that month. Furthermore, if the subject payment date
occurs during March, then, in the case of any particular mortgage loan that
accrues interest on an actual/360 basis, the amount of interest referred to in
the numerator of the fraction described in clause 1. of the second bullet point
above will be increased to reflect any interest reserve amounts with respect to
that mortgage loan that are transferred from the bond trustee's interest reserve
account to the bond trustee's collection account during that month.
"USAP" means the Uniform Single Attestation Program for Mortgage
Bankers established by the Mortgage Bankers of America.
[INCLUDE OTHER TERMS THAT ARE TO BE USED IN THE ANNEXES TO THIS
PROSPECTUS SUPPLEMENT.]
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The attached diskette contains one spreadsheet file that can be put on a
user-specified hard drive or network drive. This spreadsheet file is
"___________________". The spreadsheet file "__________________" is a Microsoft
Excel(1), Version 5.0 spreadsheet. The file provides, in electronic format, the
statistical information that appears under the caption "Description of the
Mortgage Collateral" in, and on Annexes A-1 and A-2, as well as information on
the pledged mortgage loans and underlying real properties shown in, this
prospectus supplement. Defined terms used, but not otherwise defined, in the
spreadsheet file will have the respective meanings assigned to them in this
prospectus supplement. All the information contained in the spreadsheet file is
subject to the same limitations and qualifications contained in this prospectus
supplement. Prospective investors are strongly urged to read this prospectus
supplement and accompanying prospectus in its entirety prior to accessing the
spreadsheet file.
----------------
(1) Microsoft Excel is a registered trademark of Microsoft Corporation.
S-159
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===============================================================================
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
<S> <C>
Important Notice About The Information Contained in this Prospectus
Supplement, the Accompanying Prospectus and the Related
Registration Statement ............................................................2
Summary of Prospectus Supplement....................................................4
Risk Factors.......................................................................25
Capitalized Terms Used in this Prospectus Supplement...............................35
Forward-Looking Statements.........................................................35
Description of the Mortgage Collateral.............................................35
Servicing of the Pledged Mortgage Loans............................................54
Description of the Offered Bonds...................................................77
Yield And Maturity Considerations..................................................98
Use of Proceeds...................................................................105
Federal Income Tax Consequences...................................................105
ERISA Considerations..............................................................108
Legal Investment..................................................................113
Method of Distribution............................................................114
Legal Matters.....................................................................115
Ratings...........................................................................115
Glossary..........................................................................117
ANNEX A-1 -- Certain Characteristics of the Mortgage Loans......................A-1-1
ANNEX A-2 -- Certain Monetary Terms of the
Mortgage Loans...............................................................A-2-1
ANNEX B -- Term Sheet.............................................................B-1
ANNEX C-1 -- Price/Yield Tables.................................................C-1-1
ANNEX C-2 -- Decrement Tables...................................................C-2-1
ANNEX D -- Form of Delinquent Loan Status Report..................................D-1
ANNEX E -- Form of Historical Loan Modification Report............................E-1
ANNEX F -- Form of Historical Liquidation Report..................................F-1
ANNEX G -- Form of REO Status Report..............................................G-1
ANNEX H -- Form of Watch List Report..............................................H-1
ANNEX I -- Form of Operating Statement Analysis...................................I-1
ANNEX J -- Form of NOI Adjustment Worksheet.......................................J-1
ANNEX K -- Form of Comparative Financial Status Report............................K-1
PROSPECTUS
Important Notice about the Information Presented
in this Prospectus...............................................................3
Available Information; Incorporation by Reference...................................3
Summary of Prospectus...............................................................4
Risk Factors.......................................................................15
Description of the Trust Estates...................................................36
Yield and Maturity Considerations..................................................61
Structured Asset Securities Corporation............................................67
Issuers............................................................................68
Description of the Bonds...........................................................68
Description of the Governing Documents.............................................78
Legal Aspects of the Mortgage Loans................................................92
Federal Income Tax Consequences...................................................105
State and Other Tax Consequences..................................................136
ERISA Considerations..............................................................136
Legal Investment..................................................................141
Use of Proceeds...................................................................143
Method of Distribution............................................................143
Legal Matters.....................................................................145
Financial Information.............................................................145
Rating............................................................................145
</TABLE>
UNTIL _______________, ALL DEALERS THAT EFFECT TRANSACTIONS IN THE OFFERED
BONDS, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================================
===============================================================================
$----------
(APPROXIMATE)
LB COMMERCIAL MORTGAGE TRUST ____
(DEPOSITOR)
CLASS A-1, CLASS A-2, CLASS B, CLASS C,
CLASS D, CLASS E, CLASS F AND CLASS X
SERIES _____ COLLATERALIZED MORTGAGE
OBLIGATIONS
PROSPECTUS SUPPLEMENT
LEHMAN BROTHERS
===============================================================================
<PAGE>
PROSPECTUS
STRUCTURED ASSET SECURITIES CORPORATION, THE DEPOSITOR
COLLATERALIZED MORTGAGE OBLIGATIONS, ISSUABLE IN SERIES
Our name is Structured Asset Securities Corporation. We intend
to offer from time to time collateralized mortgage obligations in the form of
bonds. These offers may be made through one or more different methods, including
offerings through underwriters. We do not currently intend to list those bonds
on any national securities exchange or the NASDAQ stock market. See "Method of
Distribution."
--------------------------------------------------------------------------------
THE OFFERED BONDS:
The offered bonds will be issuable in series. Each series of offered bonds
will--
- have its own series designation,
- consist of one or more classes with various payment characteristics,
- be issued by an owner trust established by us,
- be secured, nonrecourse obligations of the related issuer, and
- be payable solely out of the related mortgage collateral and the other
assets of the related trust estate.
No governmental agency or instrumentality will insure or guarantee payment on
the offered bonds. Neither we nor any of our affiliates, other than the related
issuer, are responsible for making payments on any series of offered bonds if
collections on the assets of the related trust estate are insufficient.
--------------------------------------------------------------------------------
THE MORTGAGE COLLATERAL AND OTHER ASSETS OF THE TRUST ESTATES:
In order to secure its obligations, in particular its payment obligations, with
respect to a series of offered bonds, the related issuer will pledge, among
other things, the following mortgage assets--
- mortgage loans secured by first and junior liens on, or security
interests in, various interests in commercial and multifamily real
properties,
- mortgage-backed securities that directly or indirectly evidence
interests in, or are directly or indirectly secured by, those types of
mortgage loans, or
- some combination of those types of mortgage loans and mortgage-backed
securities.
The trust estate for a series of offered bonds may also include letters of
credit, surety bonds, insurance policies, guarantees, credit derivatives,
reserve funds, guaranteed investment contracts, interest rate exchange
agreements, interest rate cap or floor agreements, currency exchange agreements,
or other similar instruments and agreements.
--------------------------------------------------------------------------------
In connection with each offering, we will prepare a
supplement to this prospectus in order to describe in more detail the
particular bonds being offered and the related trust estate. In that
document, we will also state the price to public for each class of offered
bonds or explain the method for determining that price. In that document, we
will also identify the applicable lead or managing underwriter(s), if any,
and provide information regarding the relevant underwriting arrangements and
the underwriters' compensation. You may not purchase the offered bonds of any
series unless you have also received the prospectus supplement for that
series. YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 16
IN THIS PROSPECTUS, AS WELL AS THOSE SET FORTH IN THE RELATED PROSPECTUS
SUPPLEMENT, PRIOR TO INVESTING.
--------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED BONDS OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------------------------------------------------------------------
The date of this prospectus is _____________________, 2000.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
page
----
<S> <C>
Important Notice About the Information Presented in this Prospectus...............3
Available Information; Incorporation by Reference.................................3
Summary of Prospectus.............................................................4
Risk Factors.....................................................................15
Capitalized Terms Used in this Prospectus........................................35
Description of the Trust Estates.................................................36
Yield and Maturity Considerations................................................58
Structured Asset Securities Corporation..........................................64
Issuers..........................................................................65
Description of the Bonds.........................................................65
Description of the Governing Documents...........................................75
Description of Credit Support....................................................90
Legal Aspects of the Mortgage Loans..............................................92
Federal Income Tax Consequences.................................................105
State and Other Tax Consequences................................................
Erisa Considerations............................................................144
Legal Investment................................................................148
Use of Proceeds.................................................................150
Method of Distribution..........................................................150
Legal Matters...................................................................151
Financial Information...........................................................152
Rating..........................................................................152
Glossary........................................................................154
</TABLE>
3
<PAGE>
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS
When deciding whether to invest in any of the offered bonds,
you should only rely on the information contained in this prospectus and the
related prospectus supplement. We have not authorized any dealer, salesman or
other person to give any information or to make any representation that is
different. In addition, information in this prospectus or any related prospectus
supplement is current only as of the date on its cover. By delivery of this
prospectus and any related prospectus supplement, we are not offering to sell
any securities, and are not soliciting an offer to buy any securities, in any
state where the offer and sale is not permitted.
AVAILABLE INFORMATION; INCORPORATION BY REFERENCE
We have filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the bonds offered by this
prospectus. This prospectus forms a part of the registration statement. This
prospectus and the related prospectus supplement do not contain all of the
information with respect to an offering that is contained in the registration
statement. For further information regarding the documents referred to in this
prospectus and the related prospectus supplement, you should refer to the
registration statement and its exhibits. You can inspect the registration
statement and its exhibits, and make copies of these documents at prescribed
rates, at the public reference facilities maintained by the SEC at its Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located as follows: Chicago Regional Office, 500 West Madison,
14th Floor, Chicago, Illinois 60661; and New York Regional Office, Seven World
Trade Center, New York, New York 10048. You can also obtain copies of these
materials electronically through the SEC's Web site (http://www.sec.gov).
In connection with each series of offered bonds, we will file
or arrange to have filed with the SEC any periodic reports that are required
under the Securities Exchange Act of 1934, as amended. All documents and reports
that are so filed with respect to any particular series of offered bonds prior
to the termination of the offering of those bonds are incorporated by reference
into, and should be considered a part of, this prospectus. Upon request, we will
provide without charge to each person receiving this prospectus in connection
with an offering, a copy of any or all documents or reports that are so
incorporated by reference. All requests should be directed to us in writing at
200 Vesey Street, New York, New York 10285, attention: Secretary, or by
telephone at 212-526-7000.
4
<PAGE>
SUMMARY OF PROSPECTUS
This summary contains selected information from this
prospectus. It does not contain all of the information you need to consider in
making your investment decision. TO UNDERSTAND ALL OF THE TERMS OF A PARTICULAR
OFFERING OF BONDS, YOU SHOULD READ CAREFULLY THIS PROSPECTUS AND THE RELATED
PROSPECTUS SUPPLEMENT IN FULL.
<TABLE>
<S> <C>
WHO WE ARE.................................................. Structured Asset Securities Corporation is a Delaware
corporation. Our principal offices are located at 200
Vesey Street, New York, New York 10285. Our main
telephone number is 212-526-7000. See "Structured Asset
Securities Corporation."
THE SECURITIES BEING OFFERED................................ The securities that will be offered by this prospectus
and the related prospectus supplements consist of
collateralized mortgage obligations issued in the form
of bonds. These bonds will be issued in series, and
each series will, in turn, consist of one or more
classes. Each class of offered bonds must, at the time
of issuance, be assigned an investment grade rating by
at least one nationally recognized statistical rating
organization. Typically, the four highest rating
categories, within which there may be sub-categories or
gradations to indicate relative standing, signify
investment grade. See "Rating."
Each series of offered bonds will in general be secured,
nonrecourse obligations of the related issuer. The
primary collateral for each series of offered bonds will
consist of commercial and/or multifamily mortgage assets
having the characteristics described in this prospectus
and the related prospectus supplement. The collateral
for any series of offered bonds, together with any other
assets intended to support payments on those bonds, will
collectively constitute the trust estate for those
bonds. Each series of offered bonds will be payable
solely from the mortgage collateral and other assets of
the related trust estate.
THE OFFERED BONDS MAY BE ISSUED WITH
OTHER BONDS................................................. We may not publicly offer all the bonds of a particular
series. We may elect to retain some of those bonds, or,
to place some privately with institutional investors or
to deliver some to the applicable seller as partial
consideration for the related mortgage assets. In
addition, some of those bonds may not satisfy the rating
requirement for offered bonds described under "--The
Securities Being Offered" above.
</TABLE>
5
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<TABLE>
<S> <C>
ISSUER...................................................... The issuer of each series of offered bonds will be an
owner trust established by us. We do not expect any
owner trust to have any significant assets other than
those pledged to secure bonds.
We will initially hold 100% of the beneficial interests
in each owner trust that issues a series of offered
bonds. We may elect, however, to transfer some or all of
those beneficial interests to one or more persons or
entities, including our affiliates. The transfer of
those beneficial interests could occur simultaneously
with the initial issuance of the related series of
offered bonds.
If so specified in the related prospectus supplement,
and subject to the satisfaction of all applicable
conditions precedent, an issuer of offered bonds may be
permitted to--
- transfer the mortgage collateral and
other assets pledged to secure those
bonds to another trust or other limited
purpose entity that assumes all of its
obligations with respect to those bonds,
thereby relieving the transferor of
those obligations, and
- issue additional series of bonds.
THE GOVERNING DOCUMENTS..................................... As stated above under "--Issuer", the issuer of each
series of offered bonds will be an owner trust. We will
establish that owner trust, and convey to it the related
mortgage collateral and other assets to be included in
the related trust estate, under a deposit trust
agreement between us, as depositor, and a bank, trust
company, corporation, association or other fiduciary, as
owner trustee.
The issuer of each series of offered bonds will--
- issue those bonds and any non-offered
bonds of the same series, and
- pledge, among other things, the related
mortgage collateral to secure its
obligations, in particular its payment
obligations, with respect to those bonds
and any non-offered bonds of the same
series,
under an indenture between the related owner trustee, on
behalf of the issuer, and a bank, trust company,
corporation, association or other fiduciary, as bond
trustee on behalf of the bondholders.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
The indenture for each series of offered bonds will set
forth, among other things--
- the terms and conditions of those bonds
and any non-offered bonds of the same
series,
- the obligations of the related issuer
with respect to those bonds and any
non-offered bonds of the same series,
and
- the obligations of the related issuer
and the related bond trustee with
respect to the related trust estate.
In general, with respect to each series of offered
bonds, a servicing and administration agreement or other
similar agreement or collection of agreements will
govern the servicing and administration of the related
mortgage assets to the extent that those matters are not
covered by the related indenture. The parties to the
servicing and administration agreement(s) for any series
of offered bonds will in all cases include the related
issuer and the related bond trustee.
If the mortgage collateral for a series of offered bonds
includes mortgage loans, the parties to the related
servicing and administration agreement(s) will also
include--
- a master servicer that will generally be
responsible for performing customary
servicing duties with respect to those
mortgage loans that are not defaulted,
nonperforming or otherwise problematic
in any material respect, and
- a special servicer that will generally
be responsible for servicing and
administering those mortgage loans that
are defaulted, nonperforming or
otherwise problematic in any material
respect and real estate assets acquired
with respect to defaulted mortgage
loans.
The same person or entity, or affiliated entities, may
act as both master servicer and special servicer for any
series of offered bonds.
If the mortgage collateral for a series of offered bonds
includes mortgage-backed securities, the parties to the
related servicing and administration agreement(s) may
also include a manager that will be responsible for
performing various administrative duties with respect to
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
those mortgage-backed securities. If the related bond
trustee assumes those duties, however, there will be no
manager.
In the related prospectus supplement, we will identify
the owner trustee, bond trustee and any master servicer,
special servicer or manager for each series of offered
bonds and will describe their respective duties in
further detail. See "Description of the Governing
Documents."
CHARACTERISTICS OF THE MORTGAGE COLLATERAL.................. The mortgage collateral for any series of offered bonds
will, in general, include mortgage loans. Each of those
mortgage loans will constitute the obligation of one or
more persons to repay a debt. The performance of that
obligation will be secured by a first or junior lien on,
or security interest in, the ownership, leasehold or
other interest(s) of the related borrower or another
person in or with respect to one or more commercial or
multifamily real properties. In particular, those
properties may include:
- rental or cooperatively-owned buildings
with multiple dwelling units;
- retail properties related to the sale of
consumer goods and other products, or
related to providing entertainment,
recreational or personal services, to
the general public;
- office buildings;
- hospitality properties;
- casino properties;
- health care-related facilities;
- industrial facilities;
- warehouse facilities, mini-warehouse
facilities and self-storage facilities;
- restaurants, taverns and other
establishments involved in the food and
beverage industry;
- manufactured housing communities, mobile
home parks and recreational vehicle
parks;
- recreational and resort properties;
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
- arenas and stadiums;
- churches and other religious facilities;
- parking lots and garages;
- mixed use properties;
- other income-producing properties; and
- unimproved land.
The mortgage loans securing a series of offered bonds
will have a variety of payment terms. For example, any
of those mortgage loans--
- may provide for the accrual of interest
at a mortgage interest rate that is
fixed over its term, that resets on one
or more specified dates or that
otherwise adjusts from time to time;
- may provide for the accrual of interest
at a mortgage interest rate that may be
converted at the borrower's election
from an adjustable to a fixed interest
rate or from a fixed to an adjustable
interest rate;
- may provide for no accrual of interest;
- may provide for level payments to stated
maturity, for payments that reset in
amount on one or more specified dates or
for payments that otherwise adjust from
time to time to accommodate changes in
the mortgage interest rate or to reflect
the occurrence of specified events;
- may be fully amortizing or,
alternatively, may be partially
amortizing or nonamortizing, with a
substantial payment of principal due on
its stated maturity date;
- may permit the negative amortization or
deferral of accrued interest;
- may prohibit some or all voluntary
prepayments or require payment of a
premium, fee or charge in connection
with those prepayments;
- may permit defeasance and the release of
real property collateral in connection
with that defeasance;
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
- may provide for payments of principal,
interest or both, on due dates that
occur monthly, bi-monthly, quarterly,
semi-annually, annually or at some other
interval; and/or
- may have two or more component parts,
each having characteristics that are
otherwise described in this prospectus
as being attributable to separate and
distinct mortgage loans.
Most, if not all, of the mortgage loans pledged as
security for a series of offered bonds will, in turn, be
secured by liens on real properties located in the
United States, its territories and possessions. However,
some of those mortgage loans may be secured by liens on
real properties located outside the United States, its
territories and possessions, provided that the foreign
mortgage loans do not represent more than 10% of the
related mortgage collateral, by balance.
We do not originate mortgage loans. However, some or all
of the mortgage loans pledged as security for a series
of offered bonds may be originated by our affiliates.
Neither we nor any of our affiliates will guarantee or
insure repayment of any of the mortgage loans pledged as
security for a series of offered bonds. Unless we
expressly state otherwise in the related prospectus
supplement, no governmental agency or instrumentality
will guarantee or insure repayment of any of the
mortgage loans pledged as security for a series of
offered bonds. See "Description of the Trust
Estates--Mortgage Loans."
The mortgage collateral for any series of offered bonds
may also include mortgage participations, mortgage
pass-through certificates, collateralized mortgage
obligations and other mortgage-backed securities, that
evidence an interest in, or are secured by a pledge of,
one or more mortgage loans of the type described above.
We will not include a mortgage-backed security among the
mortgage collateral for any series of offered bonds
unless--
- the security has been registered under
the Securities Act of 1933, as amended,
or
- we would be free to publicly resell the
security without that registration.
See "Description of the Trust Estates--Mortgage-Backed
Securities."
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
We will describe the specific characteristics of the
mortgage collateral securing a series of offered bonds
in the related prospectus supplement.
In general, the total outstanding principal balance of
the mortgage collateral securing any particular series
of bonds will equal or exceed the initial total
outstanding principal balance of those bonds. In the
event that the total outstanding principal balance of
the related mortgage collateral is less than the initial
total outstanding principal balance of any series of
bonds, the related issuer may deposit or arrange for the
deposit of cash or liquid investments on an interim
basis with the related bond trustee to cover the
shortfall. For 90 days following the date of initial
issuance of that series of bonds, the related issuer
will be entitled to obtain a release of the deposited
cash or investments if it delivers or arranges for
delivery of a corresponding amount of mortgage
collateral that satisfies the criteria specified in the
related prospectus supplement. If the related issuer
fails, however, to deliver mortgage collateral
sufficient to make up the entire shortfall, any of the
cash or, following liquidation, investments remaining on
deposit with the related bond trustee will be used by
that trustee to redeem bonds of the related series, as
described in the related prospectus supplement.
SUBSTITUTION, ACQUISITION AND RELEASE
OF THE MORTGAGE COLLATERAL.................................. If so specified in the related prospectus supplement,
we, the related issuer or another specified person or
entity may be permitted, at our or its option, but
subject to the conditions specified in that prospectus
supplement, to obtain a release of particular items of
mortgage collateral--
- in connection with a redemption of
bonds, or
- in exchange for other mortgage loans or
mortgage-backed securities that:
1. conform to the description of mortgage
assets in this prospectus, and
2. satisfy the criteria set forth in the
related prospectus supplement.
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In addition, if so specified in the related prospectus
supplement, the related bond trustee may be authorized
or required, including at the direction of the related
issuer, to apply collections on the related mortgage
collateral to acquire new mortgage loans or
mortgage-backed securities that:
1. conform to the description of mortgage
assets in this prospectus, and
2. satisfy the criteria set forth in the
related prospectus supplement.
No replacement of mortgage collateral or acquisition of
new mortgage collateral will be permitted if it would
result in a qualification, downgrade or withdrawal of
the then-current rating assigned by any rating agency to
any class of affected offered bonds.
CHARACTERISTICS OF THE OFFERED BONDS........................ An offered bond may entitle the holder to receive:
- a stated principal amount;
- interest on a principal balance or
notional amount, at a fixed, variable or
adjustable pass-through rate;
- specified, fixed or variable portions of
the interest, principal or other amounts
received on the related mortgage
collateral;
- payments of principal, with
disproportionate, nominal or no payments
of interest;
- payments of interest, with
disproportionate, nominal or no payments
of principal;
- payments of interest or principal that
commence only as of a specified date or
only after the occurrence of specified
events, such as the payment in full of
the interest and principal outstanding
on one or more other classes of bonds of
the same series;
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- payments of principal to be made, from
time to time or for designated periods,
at a rate that is--
1. faster and, in some cases, substantially
faster, or
2. slower and, in some cases, substantially
slower,
than the rate at which payments or
other collections of principal are
received on the related mortgage
collateral;
- payments of principal to be made,
subject to available funds, based on a
specified principal payment schedule or
other methodology;
- payments of all or part of the
prepayment or repayment premiums, fees
and charges, equity participations
payments or other similar items received
on the related mortgage collateral; or
- any other payments described in the
related prospectus supplement and
payable out of the assets of the related
trust estate.
Any class of offered bonds may be senior or subordinate
to one or more other classes of bonds of the same
series, including a non-offered class of bonds of that
series, for purposes of some or all payments and/or
allocations of losses.
A class of offered bonds may have two or more component
parts, each having characteristics that are otherwise
described in this prospectus as being attributable to
separate and distinct classes.
We will describe the specific characteristics of each
class of offered bonds in the related prospectus
supplement. See "Description of the Bonds."
CREDIT SUPPORT, REINVESTMENT,
INTEREST RATE AND CURRENCY RELATED
PROTECTION FOR THE OFFERED BONDS............................ Some classes of offered bonds may be protected in full
or in part against defaults and losses, or select types
of defaults and losses on the related mortgage
collateral, through--
- the subordination of one or more other
classes of bonds of the same series,
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- the subordination of the related
issuer's interest in the related
mortgage collateral,
- the subordination of the related
issuer's right to receive payment, if
any, on its interest in the related
mortgage collateral, or
- other types of credit support, which may
include a letter of credit, a surety
bond, an insurance policy, a guarantee,
a credit derivative or a reserve fund.
We will describe the credit support, if any, for each
class of offered bonds in the related prospectus
supplement.
The trust estate for any series of offered bonds may
also include any of the following agreements:
- guaranteed investment contracts in
accordance with which moneys held in the
funds and accounts established for those
bonds will be invested at a specified
rate;
- interest rate exchange agreements,
interest rate cap or floor agreements,
or other agreements and arrangements
designed to reduce the effects of
interest rate fluctuations on the
related mortgage assets or on one or
more classes of those bonds; or
- currency exchange agreements or other
agreements designed to reduce the
effects of currency exchange rate
fluctuations with respect to the related
mortgage collateral and one or more
classes of offered bonds.
We will describe the types of reinvestment, interest
rate and currency related protection, if any, for each
class of offered bonds in the related prospectus
supplement.
See "Risk Factors" and "Description of Credit Support."
ADVANCES WITH RESPECT TO THE
MORTGAGE COLLATERAL......................................... If the mortgage collateral for a series of offered bonds
includes mortgage loans, then, as and to the extent
described in the related prospectus supplement, the
related master servicer, the related special servicer,
the related bond trustee, any related provider of credit
support and/or any other specified person may be
obligated to make, or may have the option of making,
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advances with respect to those mortgage loans to cover--
- delinquent scheduled payments of
principal and/or interest, other than
balloon payments,
- property protection expenses,
- other servicing expenses, or
- any other items specified in the related
prospectus supplement.
Any party making advances will be entitled to
reimbursement from subsequent recoveries on the related
mortgage loan and as otherwise described in this
prospectus or the related prospectus supplement. That
party may also be entitled to receive interest on its
advances for a specified period. See "Description of the
Bonds--Advances."
If the mortgage collateral for a series of offered bonds
includes mortgage-backed securities, we will describe in
the related prospectus supplement any comparable
advancing obligations with respect to those
mortgage-backed securities or the underlying mortgage
loans.
REDEMPTION OF BONDS......................................... We will describe in the related prospectus supplement
any circumstances in which the offered bonds of any
series will be subject to--
- special redemption,
- optional redemption, or
- mandatory redemption.
See "Description of the Bonds--Redemption."
FEDERAL INCOME TAX CONSEQUENCES............................. For federal income tax purposes, any class of offered
bonds will constitute or evidence ownership of:
- regular interests or residual interests
in a real estate mortgage investment
conduit under Sections 860A through 860G
of the Internal Revenue Code of 1986; or
- regular interests in a financial asset
securitization investment trust within
the meaning of
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Section 860L(a) of the Internal Revenue Code of
1986; or
- indebtedness of, or notional principal
contract obligations issued by, the
related issuer.
If no REMIC election is made with respect to any issuer
of offered bonds, that issuer may, depending on the
characteristics of the offered bonds and the issuer, be
subject to taxation as a taxable mortgage pool, within
the meaning of Section 7701(i) of the Internal Revenue
Code of 1986. A taxable mortgage pool is subject to
corporate income taxation. The imposition of taxes on
the taxable income of that issuer would reduce amounts
available to make payments on the offered bonds.
See "Federal Income Tax Consequences."
ERISA CONSIDERATIONS........................................ If you are a fiduciary of an employee benefit plan or
other retirement plan or arrangement, you should review
with your legal advisor whether the purchase or holding
of offered bonds could give rise to a transaction that
is prohibited or is not otherwise permissible under
applicable law. See "ERISA Considerations."
LEGAL INVESTMENT............................................ If your investment authority is subject to legal
restrictions, you should consult your legal advisor to
determine whether and to what extent the offered bonds
constitute a legal investment for you. We will specify
in the related prospectus supplement which classes of
the offered bonds will constitute mortgage related
securities for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended. See "Legal
Investment."
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RISK FACTORS
You should consider the following factors, as well as the
factors set forth under "Risk Factors" in the related prospectus supplement, in
deciding whether to purchase offered bonds.
LACK OF LIQUIDITY WILL IMPAIR YOUR ABILITY TO SELL YOUR OFFERED BONDS AND MAY
HAVE AN ADVERSE EFFECT ON THE MARKET VALUE OF YOUR OFFERED BONDS
The offered bonds may have limited or no liquidity. We cannot
assure you that a secondary market for your offered bonds will develop. There
will be no obligation on the part of anyone to establish a secondary market.
Even if a secondary market does develop for your offered bonds, it may provide
you with less liquidity than you anticipated and it may not continue for the
life of your offered bonds.
We will describe in the related prospectus supplement the
information that will be available to you with respect to your offered bonds.
The limited nature of that information may adversely affect the liquidity of
your offered bonds.
We do not currently intend to list the offered bonds on any
national securities exchange or the NASDAQ stock market.
Lack of liquidity will impair your ability to sell your
offered bonds and may prevent you from doing so at a time when you may want or
need to. Lack of liquidity could adversely affect the market value of your
offered bonds. We will describe in the related prospectus supplement any
redemption rights with respect to your offered bonds.
If you decide to sell your offered bonds, you may have to sell
them at a discount from the price you paid for reasons unrelated to the
performance of your offered bonds or the related mortgage collateral. Pricing
information regarding your offered bonds may not be generally available on an
ongoing basis.
THE MARKET VALUE OF YOUR OFFERED BONDS MAY BE ADVERSELY AFFECTED BY FACTORS
UNRELATED TO THE PERFORMANCE OF YOUR OFFERED BONDS AND THE RELATED MORTGAGE
COLLATERAL, SUCH AS FLUCTUATIONS IN INTEREST RATES AND THE SUPPLY AND DEMAND OF
CMBS GENERALLY.
The market value of your offered bonds can decline even if
those bonds and the related mortgage collateral are performing at or above your
expectations.
The market value of your offered bonds will be sensitive to
fluctuations in current interest rates. However, a change in the market value
of your offered bonds as a result of an upward or downward movement in
current interest rates may not equal the change in the market value of your
offered bonds as a result of an equal but opposite movement in interest rates.
The market value of your offered bonds will also be
influenced by the supply of and demand for commercial mortgage-backed
securities generally. The supply of commercial mortgage-backed securities
will depend on, among other things, the amount of commercial and multifamily
mortgage loans, whether newly originated or held in portfolio, that are
available for securitization. A number of factors will affect investors'
demand for commercial mortgage-backed securities, including--
- the availability of alternative investments that
offer higher yields or are perceived as being a
better credit risk, having a less volatile market
value or being more liquid,
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- legal and other restrictions that prohibit a
particular entity from investing in commercial
mortgage-backed securities or limit the amount or
types of commercial mortgage-backed securities that
it may acquire,
- investors' perceptions regarding the commercial and
multifamily real estate markets, which may be
adversely affected by, among other things, a decline
in real estate values or an increase in defaults and
foreclosures on mortgage loans secured by
income-producing properties, and
- investors' perceptions regarding the capital markets
in general, which may be adversely affected by
political, social and economic events completely
unrelated to the commercial and multifamily real
estate markets.
If you decide to sell your offered bonds, you may have to sell
at discount from the price you paid for reasons unrelated to the performance of
your offered bonds or the related mortgage assets. Pricing information regarding
your offered bonds may not be generally available on an ongoing basis.
PAYMENTS ON THE OFFERED BONDS WILL BE MADE SOLELY FROM THE LIMITED ASSETS OF THE
RELATED TRUST ESTATE, AND THOSE ASSETS MAY BE INSUFFICIENT TO MAKE ALL REQUIRED
PAYMENTS ON THOSE BONDS
We do not expect that the issuer of any series of offered
bonds will have any significant assets other than those pledged to secure bonds.
Furthermore, the offered bonds will in general be nonrecourse obligations of the
related issuer. No governmental agency or instrumentality will guarantee or
insure payment on the offered bonds. In addition, neither we nor any of our
affiliates, other than the related issuer, are responsible for making payments
on any series of offered bonds if collections on the assets of the related trust
estate are insufficient. If the assets of the related trust estate are
insufficient to make payments on your offered bonds, no other assets will be
available to you for payment of the deficiency, and you will bear the resulting
loss. Any advances made by a master servicer or other party with respect to the
mortgage assets securing your offered bonds are intended solely to provide
liquidity and not credit support. The party making those advances will have a
right to reimbursement, probably with interest, which is senior to your right to
receive payment on your offered bonds.
YOU MAY HAVE A LIMITED ABILITY TO DECLARE AN ISSUER IN DEFAULT AND FORCE A SALE
OF THE COLLATERAL
A series of offered bonds may be structured to be no more than
mortgage pay-through bonds with limited defaults. For example, the maturity of
the bonds may be substantially later than the maturity of any of the mortgage
assets pledged to secure them. In addition, it may not be an issuer event of
default if--
- the issuer fails to pay interest on the bonds on a
current basis, or
- payments on the related mortgage collateral no longer
support payments on the bonds.
In addition, you may have only limited rights to declare, or
cause the related bond trustee to declare, a default with respect to your
offered bonds and accelerate payment on those bonds. That declaration and
acceleration may require the direction or consent of bondholders in addition to
yourself or may be entirely in the discretion of the related bond trustee.
Conversely, you may be unable to prevent that declaration and acceleration from
occurring.
Even if your offered bonds are declared due and payable
following an issuer event of default, there can be no assurance that you will be
able to force the sale of the related trust estate or any portion of that trust
estate. Any liquidation may also require the direction or consent of bondholders
in addition to yourself
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or may be wholly within the discretion of the related bond trustee. Conversely,
you may be unable to prevent any liquidation from occurring.
The market value of the mortgage collateral for any series of
offered bonds will vary from time to time. The market value of that mortgage
collateral may decline, perhaps substantially, in connection with, among other
things, increases in market interest rates and/or defaults and losses on the
constituent mortgage assets. Many of the factors affecting the market value of
your offered bonds would also affect the market value of the related mortgage
collateral. Accordingly, there can be no assurance that a sale of that mortgage
collateral will generate proceeds sufficient to pay all amounts due under the
bonds that it secures, together with the costs and expenses of liquidating that
mortgage collateral.
Acceleration of payment under the bonds and liquidation of the
related collateral will, in general, be the sole remedy against an issuer
following an issuer event of default. Each holder of an offered bond will be
deemed to have agreed by the acceptance of its bond not to file a bankruptcy
petition or commence similar proceedings with respect to the related issuer.
The lack of control that any single holder of offered bonds
may have with respect to the acceleration of payments on the bonds and the sale
of the related trust estate following an issuer event of default, may adversely
affect the value and marketability of those bonds.
We will discuss issuer events of default and available
remedies more fully in the related prospectus supplement.
ISSUER BANKRUPTCY PROCEEDINGS CAN DELAY AND IMPAIR PAYMENT OF YOUR OFFERED BONDS
Under the U.S. Bankruptcy Code, upon the filing of a
bankruptcy petition, the commencement or continuation of proceedings against a
debtor are automatically stayed. Where the issuer of any series of offered bonds
is that debtor, the automatic stay would, until it was modified, prevent--
- the enforcement of the obligations of that issuer
under those bonds and the related indenture, and
- actions against the property of that issuer,
including the related mortgage collateral.
In addition, the trustee in bankruptcy for that issuer may be
able to accelerate payment of the offered bonds and liquidate the related
mortgage collateral. In the event that the principal of bonds issued at a
discount from par is declared due and payable, the holders of those bonds may be
entitled, under applicable provisions of the U.S. Bankruptcy Code, to receive no
more than an amount equal to the unpaid principal amount of those bonds less the
unamortized portion of that discount.
ANY CREDIT SUPPORT FOR YOUR OFFERED BONDS MAY BE INSUFFICIENT TO PROTECT YOU
AGAINST ALL POTENTIAL LOSSES
THE AMOUNT OF CREDIT SUPPORT WILL BE LIMITED. The rating
agencies that assign ratings to your offered bonds will establish the amount of
credit support, if any, for your offered bonds based on, among other things, an
assumed level of defaults, delinquencies and losses with respect to the related
mortgage collateral. Actual losses may, however, exceed the assumed levels. See
"Description of the Bonds--Allocation of Losses and Shortfalls" and "Description
of Credit Support." If actual losses on the related mortgage collateral exceed
the assumed levels, you may be required to bear the additional losses.
CREDIT SUPPORT MAY NOT COVER ALL TYPES OF LOSSES. The credit
support, if any, for your offered bonds may not cover all of your potential
losses. For example, some forms of credit support may not cover or may provide
limited protection against losses that you may suffer by reason of fraud or
negligence or as a
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result of uninsured casualties at the real properties securing the related
mortgage loans. You may be required to bear any losses which are not covered by
the credit support.
DISPROPORTIONATE BENEFITS MAY BE GIVEN TO SOME CLASSES AND
SERIES TO THE DETRIMENT OF OTHERS. If a form of credit support covers multiple
classes or series and losses exceed the amount of that credit support, it is
possible that the holders of offered bonds of another series or class will be
disproportionately benefited by that credit support to your detriment.
THE INVESTMENT PERFORMANCE OF YOUR OFFERED BONDS WILL DEPEND UPON PAYMENTS,
DEFAULTS AND LOSSES ON THE RELATED MORTGAGE LOANS; AND THOSE PAYMENTS, DEFAULTS
AND LOSSES MAY BE HIGHLY UNPREDICTABLE.
THE TERMS OF THE PLEDGED MORTGAGE LOANS WILL AFFECT PAYMENTS
ON YOUR OFFERED BONDS. Each of the mortgage loans that secures or underlies the
security for your offered bonds will specify the terms on which the related
borrower must repay the outstanding principal amount of the loan. The rate,
timing and amount of scheduled payments of principal may vary, and may vary
significantly, from mortgage loan to mortgage loan. The rate at which those
mortgage loans amortize will directly affect the rate at which the principal
balance or notional amount of your offered bonds is paid down or otherwise
reduced.
In addition, any mortgage loan that secures or underlies the
security for your offered bonds may permit the related borrower during some or
all of the loan term to prepay the loan. In general, a borrower will be more
likely to prepay its mortgage loan when it has an economic incentive to do so,
such as obtaining a larger loan on the same underlying real property or a lower
or otherwise more advantageous interest rate through refinancing. If a mortgage
loan includes some form of prepayment restriction, the likelihood of prepayment
should decline. These restrictions may include--
- an absolute or partial prohibition against voluntary
prepayments during some or all of the loan term, or
- a requirement that voluntary prepayments be
accompanied by some form of prepayment premium, fee
or charge during some or all of the loan term.
In many cases, however, there will be no restriction associated with the
application of insurance proceeds or condemnation proceeds as a prepayment of
principal.
THE TERMS OF THE RELATED MORTGAGE LOANS DO NOT PROVIDE
ABSOLUTE CERTAINTY AS REGARDS THE RATE, TIMING AND AMOUNT OF PAYMENTS ON YOUR
OFFERED BONDS. Notwithstanding the terms of the mortgage loans backing your
offered bonds, the amount, rate and timing of payments and other collections on
those mortgage loans will, to some degree, be unpredictable because of borrower
defaults and because of casualties and condemnations with respect to the
underlying real properties.
The investment performance of your offered bonds may vary
materially and adversely from your expectations due to--
- the rate of prepayments and other unscheduled
collections of principal on the related mortgage
loans being faster or slower than you anticipated, or
- the rate of defaults on the related mortgage loans
being faster, or the severity of losses on the
related mortgage loans being greater, than you
anticipated.
The actual yield to you, as a holder of an offered bond, may
not equal the yield you anticipated at the time of your purchase, and the total
return on investment that you expected may not be realized. In deciding
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whether to purchase any offered bonds, you should make an independent decision
as to the appropriate prepayment, default and loss assumptions to be used. If
the mortgage assets securing your offered bonds include mortgage-backed
securities, the terms of those securities may soften or enhance the effects to
you that may result from prepayments, defaults and losses on the mortgage loans
that ultimately back those securities.
PREPAYMENTS ON THE RELATED LOANS WILL AFFECT THE AVERAGE LIFE
OF YOUR OFFERED BONDS; AND THE RATE AND TIMING OF THOSE PREPAYMENTS MAY BE
HIGHLY UNPREDICTABLE. Payments of principal and/or interest on your offered
bonds will depend upon, among other things, the rate and timing of payments on
the mortgage assets securing your offered bonds. Prepayments on the mortgage
loans that constitute or ultimately back those assets may result in a faster
rate of principal payments on your offered bonds, thereby resulting in a shorter
average life for your offered bonds than if those prepayments had not occurred.
The rate and timing of principal prepayments on pools of mortgage loans varies
among pools and is influenced by a variety of economic, demographic, geographic,
social, tax and legal factors. Accordingly, neither you nor we can predict the
rate and timing of principal prepayments on the mortgage loans that secure or
underlie the security for your offered bonds. As a result, repayment of your
offered bonds could occur significantly earlier or later, and the average life
of your offered bonds could be significantly shorter or longer, than you
expected.
The extent to which prepayments on the related mortgage loans
ultimately affect the average life of your offered bonds depends on the terms
and provisions of your offered bonds. A class of offered bonds may entitle the
holders to a PRO RATA share of any prepayments on the related mortgage loans, to
all or a disproportionately large share of those prepayments, or to none or a
disproportionately small share of those prepayments. If you are entitled to a
disproportionately large share of any prepayments on the related mortgage loans,
your offered bonds may be retired at an earlier date. If, however, you are only
entitled to a small share of the prepayments on the related mortgage loans, the
average life of your offered bonds may be extended. Your entitlement to receive
payments, including prepayments, of principal of the related mortgage loans
may--
- vary based on the occurrence of specified events,
such as the retirement of one or more other classes
of bonds of the same series, or
- be subject to various contingencies, such as
prepayment and default rates with respect to the
related mortgage loans.
We will describe the terms and provisions of your offered
bonds more fully in the related prospectus supplement.
PREPAYMENTS ON THE RELATED MORTGAGE LOANS WILL AFFECT THE
YIELD ON YOUR OFFERED BONDS; AND THE RATE AND TIMING OF THOSE PREPAYMENTS MAY BE
HIGHLY UNPREDICTABLE. If you purchase your offered bonds at a discount or
premium, the yield on your offered bonds will be sensitive to prepayments on the
mortgage loans that secure or underlie the security for those bonds. If you
purchase your offered bonds at a discount, you should consider the risk that a
slower than anticipated rate of principal payments on the related mortgage loans
could result in your actual yield being lower than your anticipated yield.
Alternatively, if you purchase your offered bonds at a premium, you should
consider the risk that a faster than anticipated rate of principal payments on
the related mortgage loans could result in your actual yield being lower than
your anticipated yield. The potential effect that prepayments may have on the
yield of your offered bonds will increase as the discount deepens or the premium
increases. If the amount of interest payable on your offered bonds is
disproportionately large, as compared to the amount of principal payable on your
offered bonds, you may fail to recover your original investment under some
prepayment scenarios. The rate and timing of principal prepayments on pools of
mortgage loans varies among pools and is influenced by a variety of economic,
demographic, geographic, social, tax and legal factors. Accordingly, neither you
nor we can predict the rate
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and timing of principal prepayments on the mortgage loans that secure or
underlie the security for your offered bonds.
DELINQUENCIES, DEFAULTS AND LOSSES ON THE RELATED MORTGAGE
LOANS MAY AFFECT THE AMOUNT AND TIMING OF PAYMENTS ON YOUR OFFERED BONDS; AND
THE RATE AND TIMING OF THOSE DELINQUENCIES AND DEFAULTS, AND THE SEVERITY OF
THOSE LOSSES, ARE HIGHLY UNPREDICTABLE. The rate and timing of delinquencies and
defaults, and the severity of losses, on the related mortgage loans will impact
the amount and timing of payments on a series of offered bonds to the extent
that their effects are not offset by delinquency advances or some form of credit
support.
Unless otherwise covered by delinquency advances or some form
of credit support, defaults on the related mortgage loans may delay payments on
a series of offered bonds while the defaulted mortgage loans are worked-out or
liquidated. However, liquidations of defaulted mortgage loans prior to maturity
could affect the yield and average life of an offered bond in a manner similar
to a voluntary prepayment.
If you calculate your anticipated yield to maturity based on
an assumed rate of default and amount of losses on the related mortgage loans
that is lower than the default rate and amount of losses actually experienced,
then, to the extent that you are required to bear the additional losses, your
actual yield to maturity will be lower than you calculated and could, under some
scenarios, be negative. Furthermore, the timing of losses on the related
mortgage loans can affect your yield. In general, the earlier you bear any loss
on a mortgage loan, the greater the negative effect on your yield.
See "--Repayment of a Commercial or Multifamily Mortgage Loan
Depends Upon the Performance and Value of the Underlying Real Property, Which
May Decline Over Time, and the Related Borrower's Ability to Refinance the
Property, of Which There is no Assurance" below.
THERE IS AN INCREASED RISK OF DEFAULT ASSOCIATED WITH BALLOON
PAYMENTS. Any of the mortgage loans that secures or underlies the security for
your offered bonds may be nonamortizing or only partially amortizing. The
borrower under a mortgage loan of that type is required to make substantial
payments of principal and interest, which are commonly called balloon payments,
on the maturity date of the loan. The ability of the borrower to make a balloon
payment depends upon the borrower's ability to refinance or sell the real
property securing the loan. The ability of the borrower to refinance or sell the
property will be affected by a number of factors, including:
- the fair market value and condition of the underlying
real property;
- the level of interest rates;
- the borrower's equity in the underlying real
property;
- the borrower's financial condition;
- the operating history of the underlying real
property;
- changes in zoning and tax laws;
- changes in competition in the relevant area;
- changes in rental rates in the relevant area;
- changes in governmental regulation and fiscal policy;
- prevailing general and regional economic conditions;
- the state of the fixed income and mortgage markets;
and
- the availability of credit for multifamily rental or
commercial properties.
See "--Repayment of a Commercial or Multifamily Mortgage Loan
Depends Upon the Performance and Value of the Underlying Real Property, Which
May Decline Over Time, and the Related Borrower's Ability to Refinance the
Property, of Which There is no Assurance" below.
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Neither we nor any of our affiliates will be obligated to
refinance any mortgage loan that secures or underlies the security for your
offered bonds.
The related master servicer or special servicer may, within
prescribed limits, extend and modify mortgage loans securing your offered bonds
that are in default or as to which a payment default is imminent in order to
maximize recoveries on the defaulted loans. The related master servicer or
special servicer is only required to determine that any extension or
modification is reasonably likely to produce a greater recovery than a
liquidation of the real property securing the defaulted loan. There is a risk
that the decision of the master servicer or special servicer to extend or modify
a mortgage loan may not in fact produce a greater recovery.
YOUR OFFERED BONDS MAY BE REDEEMED BY THE RELATED ISSUER PRIOR TO MATURITY
The issuer of a series of offered bonds may have the option of
redeeming those bonds, in whole or in part, prior to maturity. Generally, an
issuer will have an economic incentive to exercise its right of optional
redemption when it can obtain alternative financing at a more advantageous
interest rate. The yield on your offered bonds may be adversely affected by that
optional redemption if and to the extent that the related issuer is not required
to pay any redemption premium.
We will describe the terms and conditions of any optional
redemption rights more fully in the related prospectus supplement.
REPAYMENT OF A COMMERCIAL OR MULTIFAMILY MORTGAGE LOAN DEPENDS UPON THE
PERFORMANCE AND VALUE OF THE UNDERLYING REAL PROPERTY, WHICH MAY DECLINE OVER
TIME, AND THE RELATED BORROWER'S ABILITY TO REFINANCE THE PROPERTY, OF WHICH
THERE IS NO ASSURANCE
MOST OF THE MORTGAGE LOANS THAT SECURE OR UNDERLIE THE
SECURITY FOR YOUR OFFERED BONDS WILL BE NONRECOURSE. You should consider all of
the mortgage loans that secure or underlie the security for your offered bonds
to be nonrecourse loans. This means that, in the event of a default, recourse
will be limited to the related real property or properties securing the
defaulted mortgage loan. In those cases where recourse to a borrower or
guarantor is permitted by the loan documents, we generally will not undertake
any evaluation of the financial condition of that borrower or guarantor.
Consequently, full and timely payment on each mortgage loan that secures or
underlies the security for your offered bonds will depend on one or more of the
following:
- the sufficiency of the net operating income of the
applicable real property;
- the market value of the applicable real property at
or prior to maturity; and
- the ability of the related borrower to refinance or
sell the applicable real property.
In general, the value of a multifamily or commercial property will depend on its
ability to generate net operating income. The ability of an owner to finance a
multifamily or commercial property will depend, in large part, on the property's
value and ability to generate net operating income.
Unless we state otherwise in the related prospectus
supplement, none of the mortgage loans that secures or underlies the security
for your offered bonds will be insured or guaranteed by any governmental entity
or private mortgage insurer.
The risks associated with lending on multifamily and
commercial properties are inherently different from those associated with
lending on the security of single-family residential properties. This is because
multifamily rental and commercial real estate lending involves larger loans and,
as described in the next subsection, repayment is dependent upon the successful
operation and value of the related real estate project.
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MANY RISK FACTORS ARE COMMON TO MOST OR ALL MULTIFAMILY AND
COMMERCIAL PROPERTIES. The following factors, among others, will affect the
ability of a multifamily or commercial property to generate net operating income
and, accordingly, its value:
- the age, design and construction quality of the
property;
- perceptions regarding the safety, convenience and
attractiveness of the property;
- the characteristics of the neighborhood where the
property is located;
- the proximity and attractiveness of competing
properties;
- the existence and construction of competing
properties;
- the adequacy of the property's management and
maintenance;
- national, regional or local economic conditions,
including plant closings, industry slowdowns and
unemployment rates;
- local real estate conditions, including an increase
in or oversupply of comparable commercial or
residential space;
- demographic factors;
- customer tastes and preferences;
- retroactive changes in building codes; and
- changes in governmental rules, regulations and fiscal
policies, including environmental legislation.
Particular factors that may adversely affect the ability of a
multifamily or commercial property to generate net operating income include:
- an increase in interest rates, real estate taxes and
other operating expenses;
- an increase in the capital expenditures needed to
maintain the property or make improvements;
- a decline in the financial condition of a major
tenant and, in particular, a sole tenant or anchor
tenant;
- an increase in vacancy rates;
- a decline in rental rates as leases are renewed or
replaced; and
- natural disasters and civil disturbances such as
earthquakes, hurricanes, floods, eruptions or riots.
The volatility of net operating income generated by a
multifamily or commercial property over time will be influenced by many of the
foregoing factors, as well as by:
- the length of tenant leases;
- the creditworthiness of tenants;
- the rental rates at which leases are renewed or
replaced;
- the percentage of total property expenses in relation
to revenue;
- the ratio of fixed operating expenses to those that
vary with revenues; and
- the level of capital expenditures required to
maintain the property and to maintain or replace
tenants.
Therefore, commercial and multifamily properties with short-term or less
creditworthy sources of revenue and/or relatively high operating costs, such as
those operated as hospitality and self-storage properties, can be expected to
have more volatile cash flows than commercial and multifamily properties with
medium- to long-term leases from creditworthy tenants and/or relatively low
operating costs. A decline in the real estate market will tend to have a more
immediate effect on the net operating income of commercial and multifamily
properties with short-term revenue sources and may lead to higher rates of
delinquency or defaults on the mortgage loans secured by those properties.
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THE SUCCESSFUL OPERATION OF A MULTIFAMILY OR COMMERCIAL
PROPERTY DEPENDS ON TENANTS. Generally, multifamily and commercial properties
are subject to leases. The owner of a multifamily or commercial property
typically uses lease or rental payments for the following purposes:
- to pay for maintenance and other operating expenses
associated with the property;
- to fund repairs, replacements and capital
improvements at the property; and
- to service mortgage loans secured by, and any other
debt obligations associated with operating, the
property.
Factors that may adversely affect the ability of a multifamily
or commercial property to generate net operating income from lease and rental
payments include:
- an increase in vacancy rates, which may result from
tenants deciding not to renew an existing lease or
discontinuing operations;
- an increase in tenant payment defaults;
- a decline in rental rates as leases are entered into,
renewed or extended at lower rates;
- an increase in the capital expenditures needed to
maintain the property or to make improvements; and
- a decline in the financial condition of a major or
sole tenant.
Various factors that will affect the operation and value of a
commercial property include:
- the business operated by the tenants;
- the creditworthiness of the tenants; and
- the number of tenants.
DEPENDENCE ON A SINGLE TENANT OR A SMALL NUMBER OF TENANTS
MAKES A PROPERTY RISKIER Collateral. In those cases where an income-producing
property is leased to a single tenant or is primarily leased to one or a small
number of major tenants, a deterioration in the financial condition or a change
in the plan of operations of any of those tenants can have particularly
significant effects on the net operating income generated by the property. If
any of those tenants defaults under or fails to renew its lease, the resulting
adverse financial effect on the operation of the property will be substantially
more severe than would be the case with respect to a property occupied by a
large number of less significant tenants.
An income-producing property operated for retail, office or
industrial purposes also may be adversely affected by a decline in a particular
business or industry if a concentration of tenants at the property is engaged in
that business or industry.
TENANT BANKRUPTCY ADVERSELY AFFECTS PROPERTY PERFORMANCE. The
bankruptcy or insolvency of a major tenant, or a number of smaller tenants, at a
commercial property may adversely affect the income produced by the property.
Under the U.S. Bankruptcy Code, a tenant has the option of assuming or rejecting
any unexpired lease. If the tenant rejects the lease, the landlord's claim for
breach of the lease would be a general unsecured claim against the tenant unless
there is collateral securing the claim. The claim would be limited to:
- the unpaid rent reserved under the lease for the
periods prior to the bankruptcy petition or any
earlier surrender of the leased premises, plus
- an amount, not to exceed three years' rent, equal to
the greater of one year's rent and 15% of the
remaining reserved rent.
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THE SUCCESS OF AN INCOME-PRODUCING PROPERTY DEPENDS ON
RELETTING VACANT SPACES. The operations at an income-producing property will be
adversely affected if the owner or property manager is unable to renew leases or
relet space on comparable terms when existing leases expire and/or become
defaulted. Even if vacated space is successfully relet, the costs associated
with reletting, including tenant improvements and leasing commissions in the
case of income-producing properties operated for retail, office or industrial
purposes, can be substantial and could reduce cash flow from the
income-producing properties. Moreover, if a tenant at a income-producing
property defaults in its lease obligations, the landlord may incur substantial
costs and experience significant delays associated with enforcing its rights and
protecting its investment, including costs incurred in renovating and reletting
the property.
If an income-producing property has multiple tenants,
re-leasing expenditures may be more frequent than in the case of a property with
fewer tenants, thereby reducing the cash flow generated by the multi-tenanted
property. Multi-tenanted properties may also experience higher continuing
vacancy rates and greater volatility in rental income and expenses.
PROPERTY VALUE MAY BE ADVERSELY AFFECTED EVEN WHEN CURRENT
OPERATING INCOME IS NOT. Various factors may affect the value of multifamily and
commercial properties without affecting their current net operating income,
including:
- changes in interest rates;
- the availability of refinancing sources;
- changes in governmental regulations, licensing or
fiscal policy;
- changes in zoning or tax laws; and
- potential environmental or other legal liabilities.
PROPERTY MANAGEMENT MAY AFFECT PROPERTY OPERATIONS AND VALUE.
The operation of an income-producing property will depend upon the property
manager's performance and viability. The property manager generally is
responsible for:
- responding to changes in the local market;
- planning and implementing the rental structure,
including staggering durations of leases and
establishing levels of rent payments;
- operating the property and providing building
services;
- managing operating expenses; and
- ensuring that maintenance and capital improvements
are carried out in a timely fashion.
Income-producing properties that derive revenues primarily
from short-term rental commitments, such as hospitality or self-storage
properties, generally require more intensive management than properties leased
to tenants under long-term leases.
By controlling costs, providing appropriate and efficient
services to tenants and maintaining improvements in good condition, a property
manager can--
- maintain or improve occupancy rates, business and
cash flow,
- reduce operating and repair costs, and
- preserve building value.
On the other hand, management errors can, in some cases, impair the long term
viability of an income-producing property.
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MAINTAINING A PROPERTY IN GOOD CONDITION IS EXPENSIVE. The
owner may be required to expend a substantial amount to maintain, renovate or
refurbish a commercial or multifamily property. Failure to do so may materially
impair the property's ability to generate cash flow. The effects of poor
construction quality will increase over time in the form of increased
maintenance and capital improvements. Even superior construction will
deteriorate over time if management does not schedule and perform adequate
maintenance in a timely fashion. There can be no assurance an income-producing
property will generate sufficient cash flow to cover the increased costs of
maintenance and capital improvements in addition to paying debt service on the
mortgage loan(s) that may encumber that property.
COMPETITION WILL ADVERSELY AFFECT THE PROFITABILITY AND VALUE
OF AN INCOME-PRODUCING PROPERTY. Some income-producing properties are located in
highly competitive areas. Comparable income-producing properties located in the
same area compete on the basis of a number of factors including:
- rental rates;
- location;
- type of business or services and amenities offered;
and
- nature and condition of the particular property.
The profitability and value of an income-producing property
may be adversely affected by a comparable property that:
- offers lower rents;
- has lower operating costs;
- offers a more favorable location; or
- offers better facilities.
Costs of renovating, refurbishing or expanding an
income-producing property in order to remain competitive can be substantial.
VARIOUS TYPES OF INCOME-PRODUCING PROPERTIES MAY PRESENT
SPECIAL RISKS. The relative importance of any factor affecting the value or
operation of an income-producing property will depend on the type and use of the
property. In addition, the type and use of a particular income-producing
property may present special risks. For example--
- Health care-related facilities and casinos are
subject to significant governmental regulation of the
ownership, operation, maintenance and/or financing of
those properties.
- Multifamily rental properties, manufactured housing
communities and mobile home parks may be subject to
rent control or rent stabilization laws and laws
governing landlord/tenant relationships.
- Hospitality and restaurant properties are often
operated under franchise, management or operating
agreements, which may be terminable by the franchisor
or operator. Moreover, the transferability of a
hotel's or restaurant's operating, liquor and other
licenses upon a transfer of the hotel or restaurant
is subject to local law requirements.
- Depending on their location, recreational and resort
properties, properties that provide entertainment
services, hospitality properties, restaurants and
taverns, mini-warehouses and self-storage facilities
tend to be adversely affected more quickly by a
general economic downturn than other types of
commercial properties.
- Marinas will be affected by various statutes and
government regulations that govern the use of, and
construction on, rivers, lakes and other waterways.
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- Some recreational and hospitality properties may have
seasonal fluctuations and/or may be adversely
affected by prolonged unfavorable weather conditions.
- Churches and other religious facilities may be highly
dependent on donations which are likely to decline as
economic conditions decline.
- Properties used as gas stations, automotive sales and
service centers, dry cleaners, warehouses and
industrial facilities may be more likely to have
environmental issues.
Additionally, many types of commercial properties are not
readily convertible to alternative uses if the original use is not successful or
may require significant capital expenditures to effect any conversion to an
alternative use. As a result, the liquidation value of any of those types of
property would be substantially less than would otherwise be the case. See
"Description of the Trust Estates--Mortgage Loans--A Discussion of the Various
Types of Multifamily and Commercial Properties That May Secure Mortgage Loans
Backing a Series of Offered Bonds."
BORROWER CONCENTRATION IN THE MORTGAGE COLLATERAL EXPOSES INVESTORS TO GREATER
RISK OF DEFAULT AND LOSS
A particular borrower or group of related borrowers may be
associated with multiple real properties underlying the mortgage collateral for
a series of offered bonds. The bankruptcy or insolvency of, or other financial
problems with respect to, that borrower or group of borrowers could have an
adverse effect on--
- the operation of all of the related real properties,
and
- the ability of those properties to produce sufficient
cash flow to make required payments on the related
mortgage loans.
For example, if a borrower or group of related borrowers that owns or controls
several real properties experiences financial difficulty at one of those
properties, it could defer maintenance at another of those properties in order
to satisfy current expenses with respect to the first property. That borrower or
group of related borrowers could also attempt to avert foreclosure by filing a
bankruptcy petition that might have the effect of interrupting debt service
payments on all the related mortgage loans for an indefinite period. In
addition, multiple real properties owned by the same borrower or related
borrowers are likely to have common management. This would increase the risk
that financial or other difficulties experienced by the property manager could
have a greater impact on the owner of the related loans.
LOAN CONCENTRATION IN THE MORTGAGE COLLATERAL EXPOSES INVESTORS TO GREATER RISK
OF DEFAULT AND LOSS
Any of the mortgage assets included as part of the mortgage
collateral for a series of offered bonds may be substantially larger than the
other assets that are part of that collateral. In general, the inclusion in a
mortgage asset pool of one or more mortgage assets that have outstanding
principal balances that are substantially larger than the other mortgage assets
in that pool can result in losses that are more severe, relative to the size of
the pool, than would be the case if the total principal balance of the pool were
distributed more evenly.
GEOGRAPHIC CONCENTRATION IN THE MORTGAGE COLLATERAL EXPOSES INVESTORS TO GREATER
RISK OF DEFAULT AND LOSS
If a material concentration of mortgage loans securing or
underlying the security for a series of offered bonds is secured by real
properties in a particular locale, state or region, then the holders of those
bonds will have a greater exposure to:
- any adverse economic developments that occur in the
locale, state or region where the properties are
located,
- changes in the real estate market where the
properties are located,
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- changes in governmental rules and fiscal policies in
the governmental jurisdiction where the properties
are located, and
- acts of nature, including floods, tornadoes and
earthquakes, in the areas where properties are
located.
CHANGES IN COLLATERAL COMPOSITION WILL CHANGE THE NATURE OF YOUR INVESTMENT
The mortgage loans that directly or indirectly back any series
of offered bonds will amortize at different rates and mature on different dates.
In addition, some of those mortgage loans may be prepaid or liquidated. As a
result, the relative composition of the mortgage collateral for those bonds will
change over time.
If you purchase bonds with an interest rate that is equal to
or calculated based upon a weighted average of interest rates on the mortgage
assets securing those bonds, your interest rate will be affected, and may
decline, as the relative composition of the related mortgage collateral changes.
In addition, as payments and other collections of principal
are received with respect to the pledged mortgage loans, the remaining mortgage
loans that directly or indirectly back your offered bonds may exhibit an
increased concentration with respect to property type, number and affiliation of
borrowers and geographic location.
ADJUSTABLE RATE MORTGAGE LOANS MAY ENTAIL GREATER RISKS OF DEFAULT TO LENDERS
THAN FIXED RATE MORTGAGE LOANS
Some or all of the mortgage loans that secure or underlie the
security for a series of offered bonds may provide for adjustments to their
respective mortgage interest rates and corresponding adjustments to their
respective periodic debt service payments. As the periodic debt service payments
for any of those mortgage loans increase, there is an increased likelihood that
cash flow from the underlying real property will be insufficient to make that
periodic debt service payment and pay operating expenses.
SUBORDINATE DEBT INCREASES THE LIKELIHOOD THAT A BORROWER WILL DEFAULT ON A
MORTGAGE LOAN BACKING YOUR OFFERED BONDS
Some or all of the mortgage loans included as part of the
mortgage collateral for a series of offered bonds may permit the related
borrower to encumber the related real property with additional secured debt.
Even if a mortgage loan prohibits further encumbrance of the
underlying real property, a violation of this prohibition may not become evident
until the affected mortgage loan otherwise defaults. Accordingly, a lender may
not realistically be able to prevent a borrower from incurring subordinate debt.
The existence of any secured subordinated indebtedness
increases the difficulty of refinancing a mortgage loan at the loan's maturity.
In addition, the related borrower may have difficulty repaying multiple loans.
Moreover, the filing of a petition in bankruptcy by, or on behalf of, a junior
lienholder may stay the senior lienholder from taking action to foreclose out
the junior lien. See "Legal Aspects of the Mortgage Loans--Subordinate
Financing."
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BORROWER BANKRUPTCY PROCEEDINGS CAN DELAY AND IMPAIR RECOVERY ON A MORTGAGE LOAN
BACKING YOUR OFFERED BONDS
Under the U.S. Bankruptcy Code, the filing of a petition in
bankruptcy by or against a borrower will stay the sale of a real property owned
by that borrower, as well as the commencement or continuation of a foreclosure
action.
In addition, if a court determines that the value of a real
property is less than the principal balance of the mortgage loan it secures, the
court may reduce the amount of secured indebtedness to the then-value of the
property. This action would make the lender a general unsecured creditor for the
difference between the then-value of the property and the amount of its
outstanding mortgage indebtedness.
A bankruptcy court also may:
- grant a debtor a reasonable time to cure a payment
default on a mortgage loan;
- reduce monthly payments due under a mortgage loan;
- change the rate of interest due on a mortgage loan;
or
- otherwise alter a mortgage loan's repayment schedule.
Furthermore, the borrower, as debtor-in-possession, or its
bankruptcy trustee has special powers to avoid, subordinate or disallow debts.
In some circumstances, the claims of a secured lender may be subordinated to
financing obtained by a debtor-in-possession subsequent to its bankruptcy.
Under the U.S. Bankruptcy Code, a lender will be stayed from
enforcing a borrower's assignment of rents and leases. The U.S. Bankruptcy Code
also may interfere with a lender's ability to enforce lockbox requirements. The
legal proceedings necessary to resolve these issues can be time consuming and
may significantly delay the receipt of rents. Rents also may escape an
assignment to the extent they are used by borrower to maintain its property or
for other court authorized expenses.
As a result of the foregoing, the related trust estate's
recovery with respect to borrowers in bankruptcy proceedings may be
significantly delayed, and the total amount ultimately collected may be
substantially less than the amount owed.
TAXES ON FORECLOSURE PROPERTY WILL REDUCE AMOUNTS AVAILABLE TO MAKE PAYMENTS ON
THE OFFERED BONDS
A trust estate for a series of offered bonds may be
designated, in whole or in part, as a real estate mortgage investment conduit
for federal income purposes. If that trust estate acquires a mortgaged property
through a foreclosure or deed in lieu of foreclosure, then the related special
servicer may be required to retain an independent contractor to operate and
manage the property. Receipt of the following types of income on that property
will subject the trust estate to federal, and possible state or local tax on
that income at the highest marginal corporate tax rate:
- any net income from that operation and management
that does not consist of qualifying rents from real
property within the meaning of Section 856(d) of the
Internal Revenue Code of 1986, and
- any rental income based on the net profits of a
tenant or sub-tenant or allocable to a service that
is non-customary in the area and for the type of
building involved.
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These taxes would reduce the net proceeds available for payment with respect to
the related offered bonds.
ENVIRONMENTAL LIABILITIES WILL ADVERSELY AFFECT THE VALUE AND OPERATION OF THE
CONTAMINATED PROPERTY AND MAY DETER A LENDER FROM FORECLOSING
There can be no assurance--
- as to the degree of environmental testing conducted
at any of the real properties securing the mortgage
loans that directly or indirectly back your offered
bonds;
- that the environmental testing conducted by or on
behalf of the applicable originators or any other
parties in connection with the origination of those
mortgage loans or otherwise identified all adverse
environmental conditions and risks at the related
real properties;
- that the results of the environmental testing were
accurately evaluated in all cases;
- that the related borrowers have implemented or will
implement all operations and maintenance plans and
other remedial actions recommended by any
environmental consultant that may have conducted
testing at the related real properties; or
- that the recommended action will fully remediate or
otherwise address all the identified adverse
environmental conditions and risks.
Environmental site assessments vary considerably in their
content, quality and cost. Even when adhering to good professional practices,
environmental consultants will sometimes not detect significant environmental
problems because to do an exhaustive environmental assessment would be far too
costly and time-consuming to be practical.
In addition, the current environmental condition of a real
property securing a mortgage loan that directly or indirectly backs your offered
bonds could be adversely affected by--
- tenants at the property, such as gasoline stations or
dry cleaners, or
- conditions or operations in the vicinity of the
property, such as leaking underground storage tanks
at another property nearby.
Various environmental laws may make a current or previous
owner or operator of real property liable for the costs of removal or
remediation of hazardous or toxic substances on, under or adjacent to the
property. Those laws often impose liability whether or not the owner or operator
knew of, or was responsible for, the presence of the hazardous or toxic
substances. For example, there are laws that impose liability for release of
asbestos containing materials into the air or require the removal or containment
of the materials. The owner's liability for any required remediation generally
is unlimited and could exceed the value of the property and/or the total assets
of the owner. In addition, the presence of hazardous or toxic substances, or the
failure to remediate the adverse environmental condition, may adversely affect
the owner's or operator's ability to use the affected property. In some states,
contamination of a property may give rise to a lien on the property to ensure
the costs of cleanup. Depending on the state, this lien may have priority over
the lien of an existing mortgage, deed of trust or other security instrument. In
addition, third parties may seek recovery from owners or operators of real
property for personal injury associated with exposure to
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hazardous substances, including asbestos and lead-based paint. Persons who
arrange for the disposal or treatment of hazardous or toxic substances may be
liable for the costs of removal or remediation of the substances at the disposal
or treatment facility.
The federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, as well as other federal and state laws,
provide that a secured lender, such as the issuer or trust estate for a series
of offered bonds, may be liable as an "owner" or "operator" of the real
property, regardless of whether the borrower or a previous owner caused the
environmental damage, if--
- agents or employees of the lender are deemed to have
participated in the management of the borrower, or
- the lender actually takes possession of a borrower's
property or control of its day-to-day operations,
including through the appointment of a receiver or
foreclosure.
Although recently enacted legislation clarifies the activities in which a lender
may engage without becoming subject to liability under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, and
similar federal laws, that legislation has no applicability to state
environmental laws. Moreover, future laws, ordinances or regulations could
impose material environmental liability.
Federal law requires owners of residential housing constructed
prior to 1978 to disclose to potential residents or purchasers--
- any condition on the property that causes exposure to
lead-based paint, and
- the potential hazards to pregnant women and young
children, including that the ingestion of lead-based
paint chips and/or the inhalation of dust particles
from lead-based paint by children can cause permanent
injury, even at low levels of exposure.
Property owners may be liable for injuries to their tenants resulting from
exposure under various laws that impose affirmative obligations on property
owners of residential housing containing lead-based paint.
SOME PROVISIONS IN THE MORTGAGE LOANS SECURING YOUR OFFERED BONDS MAY BE
CHALLENGED AS BEING UNENFORCEABLE
CROSS-COLLATERALIZATION ARRANGEMENTS. It may be possible to
challenge cross-collateralization arrangements involving more than one borrower
as a fraudulent conveyance, even if the borrowers are related. If one of those
borrowers were to become a debtor in a bankruptcy case, creditors of the
bankrupt party or the representative of the bankruptcy estate of the bankrupt
party could seek to have the bankruptcy court avoid any lien granted by the
bankrupt party to secure repayment of another borrower's loan. In order to do
so, the court would have to determine that--
- the bankrupt party--
1. was insolvent at the time of granting the lien,
2. was rendered insolvent by the granting of the
lien,
3. was left with inadequate capital, or
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4. was not able to pay its debts as they matured;
and
- the bankrupt party did not, when it allowed its
property to be encumbered by a lien securing the
other borrower's loan, receive fair consideration or
reasonably equivalent value for pledging its property
for the equal benefit of the other borrower.
If the court were to conclude that the granting of the lien was an avoidable
fraudulent conveyance, it could nullify the lien or security instrument
effecting the cross-collateralization. The court could also allow the bankrupt
party to recover payments it made under the avoided cross-collateralization.
PREPAYMENT PREMIUMS, FEES AND CHARGES. Under the laws of a
number of states, the enforceability of any mortgage loan provisions that
require payment of a prepayment premium, fee or charge upon an involuntary
prepayment, is unclear. If those provisions were unenforceable, borrowers would
have an incentive to default in order to prepay their loans.
DUE-ON-SALE AND DEBT ACCELERATION CLAUSES. Some or all of the
mortgage loans included as part of the mortgage collateral for a series of
offered bonds may contain a due-on-sale clause, which permits the lender, with
some exceptions, to accelerate the maturity of the mortgage loan upon the sale,
transfer or conveyance of--
- the related real property, or
- a majority ownership interest in the related
borrower.
We anticipate that all of the mortgage loans included as part
of the mortgage collateral for a series of offered bonds will contain some form
of debt-acceleration clause, which permits the lender to accelerate the debt
upon specified monetary or non-monetary defaults by the related borrower.
The courts of all states will enforce acceleration clauses in
the event of a material payment default. The equity courts of any state,
however, may refuse to allow the foreclosure of a mortgage, deed of trust or
other security instrument or to permit the acceleration of the indebtedness if:
- the default is deemed to be immaterial,
- the exercise of those remedies would be inequitable
or unjust, or
- the circumstances would render the acceleration
unconscionable.
ASSIGNMENTS OF LEASES. Some or all of the mortgage loans
included as part of the mortgage collateral for a series of offered bonds may be
secured by, among other things, an assignment of leases and rents. Under that
document, the related borrower will assign its right, title and interest as
landlord under the leases on the related real property and the income derived
from those leases 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 borrower defaults, the license terminates and the
lender is entitled to collect rents. In some cases, those assignments may not be
perfected as security interests prior to actual possession of the cash flow.
Accordingly, state law may require that the lender take possession of the
property and obtain a judicial appointment of a receiver before becoming
entitled to collect the rents. In addition, the commencement of bankruptcy or
similar proceedings by or with respect to the borrower will adversely affect the
lender's ability to collect the rents. See "Legal Aspects of the Mortgage
Loans--Bankruptcy Laws."
DEFEASANCE. A mortgage loan securing a series of offered bonds
may permit the related borrower, during the periods specified and subject to the
conditions set forth in the loan, to pledge to the holder of the mortgage loan a
specified amount of direct, non-callable United States government securities and
thereby obtain a release of the related mortgaged property. The cash amount
which a Borrower must expend to
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purchase, or must deliver to a master servicer in order for the master servicer
to purchase, the required United States government securities may be in excess
of the principal balance of the mortgage loan. A court could interpret that
excess amount as a form of prepayment premium or could take it into account for
usury purposes. In some states, some forms of prepayment premiums are
unenforceable. If the payment of that excess amount were held to be
unenforceable, the remaining portion of the cash amount to be delivered may be
insufficient to purchase the requisite amount of United States government
securities.
LACK OF INSURANCE COVERAGE EXPOSES A LENDER TO RISK FOR SPECIFIED SPECIAL HAZARD
LOSSES
In general, the standard form of fire and extended coverage
policy covers physical damage to or destruction of the improvements of a
property by fire, lightning, explosion, smoke, windstorm and hail, and riot,
strike and civil commotion, subject to the conditions and exclusions specified
in the related policy. Most insurance policies typically do not cover any
physical damage resulting from, among other things:
- war,
- revolution,
- governmental actions,
- floods and other water-related causes,
- earth movement, including earthquakes, landslides and
mudflows,
- wet or dry rot,
- vermin, and
- domestic animals.
Unless the related mortgage loan documents specifically
require the borrower to insure against physical damage arising from these
causes, then the resulting losses may be borne by you as a holder of offered
bonds.
GROUND LEASES CREATE RISKS FOR LENDERS THAT ARE NOT PRESENT WHEN LENDING ON AN
ACTUAL OWNERSHIP INTEREST IN A REAL PROPERTY
In order to secure a mortgage loan, a borrower may grant a
lien on its leasehold interest in a real property as tenant under a ground
lease. If the ground lease does not provide for notice to a lender of a default
under that ground lease on the part of the borrower, together with a reasonable
opportunity for the lender to cure the default, the lender may be unable to
prevent termination of the lease and may lose its collateral.
In addition, upon the bankruptcy of a landlord or a tenant
under a ground lease, the debtor entity has the right to assume or reject the
ground lease. If a debtor landlord rejects the lease, the tenant has the right
to remain in possession of its leased premises at the rent reserved in the lease
for the term, including renewals. If a debtor tenant rejects any or all of its
leases, the tenant's lender may not be able to succeed to the tenant's position
under the lease unless the landlord has specifically granted the lender that
right. If both the landlord and the tenant are involved in bankruptcy
proceedings, your offered bond trustee may be unable to enforce the bankrupt
tenant's obligation to refuse to treat as terminated a ground lease rejected by
a bankrupt landlord. In those circumstances, it is possible that your offered
bond trustee could be deprived of its security interest in the leasehold estate,
notwithstanding lender protection provisions contained in the lease or mortgage
loan documents.
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CHANGES IN ZONING LAWS MAY ADVERSELY AFFECT THE USE OR VALUE OF A REAL PROPERTY
Due to changes in zoning requirements since construction, an
income-producing property may not comply with current zoning laws, including
density, use, parking and set back requirements. Accordingly, the property may
be a permitted non-conforming structure or the operation of the property may be
a permitted non-conforming use. This means that the owner is not required to
alter the property's structure or use to comply with the new law, but the owner
may be limited in its ability to rebuild the premises "as is" in the event of a
substantial casualty loss. This may adversely affect the cash flow available
following the casualty. If a substantial casualty were to occur, insurance
proceeds may not be sufficient to pay a mortgage loan secured by the property in
full. In addition, if the property were repaired or restored in conformity with
the current law, its value or revenue-producing potential may be less than that
which existed before the casualty.
COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT OF 1990 MAY BE EXPENSIVE
Under the Americans with Disabilities Act of 1990, all public
accommodations are required to meet federal requirements related to access and
use by disabled persons. If a property does not currently comply with that Act,
the property owner may be required to incur significant costs in order to effect
that compliance. This will reduce the amount of cash flow available to cover
other required maintenance and capital improvements and to pay debt service on
the mortgage loan(s) that may encumber that property. There can be no assurance
that the owner will have sufficient funds to cover the costs necessary to comply
with that Act. In addition, noncompliance could result in the imposition of
fines by the federal government or an award or damages to private litigants.
LITIGATION MAY ADVERSELY AFFECT A BORROWER'S ABILITY TO REPAY ITS MORTGAGE LOAN
The owner of a multifamily or commercial property may be a
defendant in a litigation arising out of, among other things, the following:
- breach of contract involving a tenant, a supplier or
other party;
- negligence resulting in a personal injury, or
- responsibility for an environmental problem.
Litigation will divert the owner's attention from operating
its property. If the litigation were decided adversely to the owner, the award
to the plaintiff may adversely affect the owner's ability to repay a mortgage
loan secured by the property.
RESIDUAL INTERESTS IN A REAL ESTATE MORTGAGE INVESTMENT CONDUIT HAVE ADVERSE TAX
CONSEQUENCES
INCLUSION OF TAXABLE INCOME IN EXCESS OF CASH RECEIVED. If you
own a bond that is a residual interest in a real estate mortgage investment
conduit for federal income tax purposes, you will have to report on your income
tax return as ordinary income your PRO RATA share of the taxable income of that
REMIC, regardless of the amount or timing of your possible receipt of any cash
on the bond. As a result, your offered bond may have phantom income early in
the term of the REMIC because the taxable income from the bond may exceed the
amount of economic income, if any, attributable to the bond. While you will
have a corresponding amount of tax losses later in the term of the REMIC, the
present value of the phantom income may significantly exceed the present
value of the tax losses. Therefore, the after-tax yield on any REMIC residual
bond may be significantly less than that of a corporate bond or other
instrument having similar cash flow characteristics. In fact,some offered
bonds that are residual interests may have a negative value.
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You have to report your share of the taxable income and net
loss of the REMIC until all the bonds in the related series have a principal
balance of zero. See "Federal Income Tax Consequences--REMICs."
SOME TAXABLE INCOME OF A "RESIDUAL INTEREST" CAN NOT BE OFFSET
UNDER THE INTERNAL REVENUE CODE OF 1986. A portion of the taxable income from a
REMIC residual bond may be treated as excess inclusions under the Internal
Revenue Code of 1986. You will have to pay tax on the excess inclusions
regardless of whether you have other credits, deductions or losses. In
particular, the tax on excess inclusion:
- generally will not be reduced by losses from other
activities,
- for a tax-exempt holder, will be treated as unrelated
business taxable income, and
- for a foreign holder, will not qualify for any
exemption from withholding tax.
SOME ENTITIES SHOULD NOT INVEST IN REMIC RESIDUAL BONDS. The
fees and non-interest expense of a REMIC will be allocated PRO RATA to bonds
that are residual interests in REMIC. However, individuals will only be able to
deduct these expenses as miscellaneous itemized deductions, which are subject to
numerous restrictions and limitations under the Internal Revenue Code of 1986.
Therefore, the bonds that are residual interests generally are not appropriate
investments for:
- individuals,
- estates,
- trusts beneficially owned by any individual or
estate, and
- pass-through entities having any individual, estate
or trust as a shareholder, member or partner.
In addition, the REMIC residual bonds will be subject to
numerous transfer restrictions. These restrictions will reduce your ability to
liquidate a REMIC residual bond. For example, unless we indicate otherwise in
the related prospectus supplement, you will not be able to transfer a REMIC
residual bond to a foreign person under the Internal Revenue Code of 1986.
See "Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Residual Bonds."
TAXATION OF ISSUERS THAT ARE TREATED AS A TAXABLE MORTGAGE POOLS
If no REMIC or FASIT election is made with respect to an
issuer of offered bonds, depending on the characteristics of the offered
bonds and the issuer, the issuer may be treated as a taxable mortgage pool
for federal income tax purposes under Section 7701(i) of the Internal Revenue
Code of 1986. In general, a taxable mortgage pool is treated as a separate
corporation not includible with any other corporation in a consolidated
return, and is subject to federal income taxation. If the issuer is, or is
wholly-owned by, a real estate investment trust, or REIT, however,
classification of the issuer as a taxable mortgage pool does not cause it to
be subject to corporate income tax. Rather, the consequence of the issuer
being classified as a taxable mortgage pool is that the shareholders of the
issuer, or of the REIT that wholly owns the issuer, are required to treat a
portion of their income attributable to their shares as though it were excess
inclusions with respect to a residual interest in a REMIC. See "Federal
Income Tax Consequences--REMICs."
It is therefore possible that some issuers as to which no
REMIC or FASIT election is made may be structured to qualify as, and elect to be
treated as, REITs or wholly-owned subsidiaries of REITs for federal income tax
purposes. In that event, the related prospectus supplement will describe the
consequences of
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that classification and of the failure of that issuer to be, or to maintain its
status as, a REIT or a wholly owned subsidiary of a REIT. The related prospectus
supplement will also describe the conditions to which that issuer has agreed
relating to the maintenance of its status as a REIT or a wholly-owned subsidiary
of a REIT, and the consequences under the Governing Documents if it does not do
so.
To the extent that the issuer described in the prior
paragraph is a taxable mortgage pool, and is not a REIT or a wholly-owned
subsidiary of a REIT, the corporate income taxes imposed on its taxable
income, that is, the excess of its interest and other income over its
deductions for interest, discount, servicing and other expenses, will reduce
the cash flow available to make payments on the offered bonds. In addition,
the need for cash to pay taxes could result in the liquidation of part or all
of the collateral and the consequent retirement of offered bonds at a time
earlier than anticipated. See "Federal Income Tax Consequences--Debt and
Notional Principal Contracts-- Taxation of the Issuer."
PROBLEMS WITH BOOK-ENTRY REGISTRATION
Your offered bonds may be issued in book-entry form through
the facilities of the Depository Trust Company. As a result--
- you will be able to exercise your rights as a
bondholder only indirectly through the Depository
Trust Company and its participating organizations;
- you may have only limited access to information
regarding your offered bonds;
- you may suffer delays in the receipt of payments on
your offered bonds; and
- your ability to pledge or otherwise take action with
respect to your offered bonds may be limited due to
the lack of a physical bond evidencing your ownership
of those bonds.
See "Description of the Bonds--Book-Entry Registration."
POTENTIAL CONFLICTS OF INTEREST CAN AFFECT A PERSON'S PERFORMANCE
The master servicer or special servicer for a series of
offered bonds, or any of their respective affiliates, may purchase bonds,
including non-offered bonds, of that series.
In addition, the master servicer or special servicer for a
series of offered bonds, or any of their respective affiliates, may have
interests in, or other financial relationships with, borrowers under the related
mortgage loans.
In servicing the mortgage loans securing a series of offered
bonds, the related master servicer and special servicer will each be required to
observe the terms of the servicing and administration agreement(s) for that
series of offered bonds and, in particular, to act in accordance with the
servicing standard described in the related prospectus supplement. You should
consider, however, that either of these parties, if it or an affiliate owns
bonds, or has financial interests in or other financial dealings with any of the
related borrowers, may have interests when dealing with the mortgage loans
backing your offered bonds that are in conflict with your interests. For
example, if the related special servicer owns any bonds, it could seek to
mitigate the potential loss on its bonds from a troubled mortgage loan by
delaying enforcement in the hope of realizing greater proceeds in the future.
However, this action by a special servicer could result a lower recovery to the
related trust than would have been the case if the special servicer had not
delayed in taking enforcement action.
Furthermore, the master servicer or special servicer for a
series of offered bonds may service existing and new loans for third parties,
including portfolios of loans similar to the mortgage loans included as part of
the related mortgage collateral. The properties securing these other loans may
be in the same markets as and
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compete with the properties securing mortgage loans included as part of the
related mortgage collateral. Accordingly, that master servicer or special
servicer may be acting on behalf of parties with conflicting interests.
THE TRANSITION FROM THE YEAR 1999 TO THE YEAR 2000 MAY DISRUPT THE ABILITY OF
COMPUTERIZED SYSTEMS TO PROCESS INFORMATION
The collection of payments on the mortgage assets securing
your offered bonds, the servicing and administration of those mortgage assets
and the payments on your offered bonds are highly dependent upon computer
systems of the related master servicer, special servicer, manager, bond trustee,
borrowers and other third parties.
We will inquire from each of the parties to the governing
documents for a series of offered bonds whether and how the transition from 1999
to 2000 has affected their computer systems. We also will obtain assurances from
these parties that they are taking the necessary steps to cure any problems
their computer systems may have with the manipulation or calculation of dates
after December 31, 1999. Notwithstanding those inquiries and assurances,
unforeseen problems in this regard could still occur.
CAPITALIZED TERMS USED IN THIS PROSPECTUS
From time to time we use capitalized terms in this
prospectus. Each of those capitalized terms will have the meaning assigned to
it in the "Glossary" attached to this prospectus.
DESCRIPTION OF THE TRUST ESTATES
GENERAL
The trust estate for each series of offered bonds will consist
of--
- all collateral pledged by the related issuer to
secure its obligations, in particular its payment
obligations, with respect to those bonds, and
- all other assets intended to support payments on
those bonds.
The collateral for each series of offered bonds will primarily
consist of:
- various types of multifamily and/or commercial
mortgage loans;
- mortgage participations, pass-through certificates,
collateralized mortgage obligations or other
mortgage-backed securities that directly or
indirectly evidence interests in, or are secured by
pledges of, one or more of various types of
multifamily and/or commercial mortgage loans; or
- a combination of mortgage loans and mortgage-backed
securities of the types described above.
We do not originate mortgage loans. Accordingly, we must
acquire each of the mortgage loans to be pledged as security for a series of
offered bonds from the originator or a subsequent assignee. In some cases, that
originator or subsequent assignee will be one of our affiliates.
Unless we indicate otherwise in the related prospectus
supplement, we will acquire, directly or through one of our affiliates, in the
secondary market, any mortgage-backed security to be included in one of our
trusts.
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Neither we nor any of our affiliates will guarantee any of the
mortgage assets pledged as security for a series of offered bonds. Furthermore,
unless we indicate otherwise in the related prospectus supplement, no
governmental agency or instrumentality will guarantee or insure any of those
mortgage assets.
MORTGAGE LOANS
GENERAL. Each mortgage loan securing a series of offered bonds
will constitute the obligation of one or more persons to repay a debt. That
obligation will be evidenced by a promissory note or bond. In addition, that
obligation will be secured by a mortgage, deed of trust or other security
instrument that creates a first or junior lien on, or security interest in, an
interest in one or more of the following types of real property:
- rental or cooperatively-owned buildings with multiple
dwelling units;
- retail properties related to the sale of consumer
goods and other products to the general public, such
as shopping centers, malls, factory outlet centers,
automotive sales centers, department stores and other
retail stores, grocery stores, specialty shops,
convenience stores and gas stations;
- retail properties related to providing entertainment,
recreational and personal services to the general
public, such as movie theaters, fitness centers,
bowling alleys, salons, dry cleaners and automotive
service centers;
- office properties;
- hospitality properties, such as hotels, motels and
other lodging facilities;
- casino properties;
- health care-related properties, such as hospitals,
skilled nursing facilities, nursing homes, congregate
care facilities and, in some cases, assisted living
centers and senior housing;
- industrial properties;
- warehouse facilities, mini-warehouse facilities and
self-storage facilities;
- restaurants, taverns and other establishments
involved in the food and beverage industry;
- manufactured housing communities, mobile home parks
and recreational vehicle parks;
- recreational and resort properties, such as
recreational vehicle parks, golf courses, marinas,
ski resorts and amusement parks;
- arenas and stadiums;
- churches and other religious facilities;
- parking lots and garages;
- mixed use properties;
- other income-producing properties; and
- unimproved land.
The real property interests that may be encumbered in order to
secure a mortgage loan securing your offered bonds, include--
- a fee interest or estate, which consists of ownership
of the property for an indefinite period,
- an estate for years, which consists of ownership of
the property for a specified period of years,
- a leasehold interest or estate, which consists of a
right to occupy and use the property for a specified
period of years, subject to the terms and conditions
of a lease,
- shares in a cooperative corporation which owns the
property, or
- any other real estate interest under applicable local
law.
Any of these real property interests may be subject to deed
restrictions, easements, rights of way and other matters of public record with
respect to the related property. In addition, the use of, and improvements
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that may be constructed on, any particular real property will, in most cases, be
subject to zoning laws and other legal restrictions.
Most, if not all, of the mortgage loans pledged as security
for a series of offered bonds will, in turn, be secured by liens on real
properties located in the United States, its territories and possessions.
However, some of those mortgage loans may be secured by liens on real properties
located outside the United States, its territories and possessions, provided
that the foreign mortgage loans do not represent more than 10% of the related
mortgage collateral, by balance.
If we so indicate in the related prospectus supplement, one or
more of the mortgage loans securing a series of offered bonds may be secured by
a junior lien on the related real property. However, the loan or loans secured
by the more senior liens on that property may not be pledged as security for the
related series of offered bonds. The primary risk to the holder of a mortgage
loan secured by a junior lien on a real property is the possibility that the
foreclosure proceeds remaining after payment of the loans secured by more senior
liens on that property will be insufficient to pay the junior loan in full. In a
foreclosure proceeding, the sale proceeds are applied--
- FIRST, to the payment of court costs and fees in
connection with the foreclosure,
- SECOND, to the payment of real estate taxes, and
- THIRD, to the payment of any and all principal,
interest, prepayment or acceleration penalties, and
other amounts owing to the holder of the senior
loans.
The claims of the holders of the senior loans must be satisfied in full before
the holder of the junior loan receives any payments with respect to the junior
loan. If a lender forecloses on a junior loan, it does so subject to any related
senior loans.
If we so indicate in the related prospectus supplement, the
mortgage loans securing a series of offered bonds may be delinquent as of the
date the bonds are initially issued. In those cases, we will describe in the
related prospectus supplement--
- the period of the delinquency,
- any forbearance arrangement then in effect,
- the condition of the related real property, and
- the ability of the related real property to generate
income to service the mortgage debt.
We will not, however, allow the related issuer to pledge any mortgage loan as
security for a series of offered bonds if we know that the mortgage loan is, at
the time of the pledge, more than 90 days delinquent with respect to any
scheduled payment of principal or interest or in foreclosure.
A DISCUSSION OF THE VARIOUS TYPES OF MULTIFAMILY AND
COMMERCIAL PROPERTIES THAT MAY SECURE MORTGAGE LOANS BACKING A SERIES OF OFFERED
BONDS. The mortgage loans securing a series of offered bonds may, in turn, be
secured by numerous types of multifamily and commercial properties. As we
discuss below under "--Mortgage Loans--Default and Loss Considerations with
Respect to Commercial and Multifamily Mortgage Loans," the adequacy of an
income-producing property as security for a mortgage loan depends in large part
on its value and ability to generate net operating income. Set forth below is a
discussion of some of the various factors that may affect the value and
operations of the indicated types of multifamily and commercial properties.
MULTIFAMILY RENTAL PROPERTIES. Factors affecting the value and
operation of a multifamily rental property include:
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- the physical attributes of the property, such as its
age, appearance, amenities and construction quality;
- the types of services offered at the property;
- the location of the property;
- the characteristics of the surrounding neighborhood,
which may change over time;
- the rents charged for dwelling units at the property
relative to the rents charged for comparable units at
competing properties;
- the ability of management to provide adequate
maintenance and insurance;
- the property's reputation;
- the level of mortgage interest rates, which may
encourage tenants to purchase rather than lease
housing;
- the existence or construction of competing or
alternative residential properties, including other
apartment buildings and complexes, manufactured
housing communities, mobile home parks and
single-family housing;
- the ability of management to respond to competition;
- the tenant mix and whether the property is primarily
occupied by workers from a particular company or type
of business, personnel from a local military base or
students;
- adverse local, regional or national economic
conditions, which may limit the amount that may be
charged for rents and may result in a reduction in
timely rent payments or a reduction in occupancy
levels;
- state and local regulations, which may affect the
property owner's ability to increase rent to the
market rent for an equivalent apartment; - the extent
to which the property is subject to land use
restrictive covenants or contractual covenants that
require that units be rented to low income tenants;
- the extent to which the cost of operating the
property, including the cost of utilities and the
cost of required capital expenditures, may increase;
and
- the extent to which increases in operating costs may
be passed through to tenants.
Because units in a multifamily rental property are leased to
individuals, usually for no more than a year, the property is likely to respond
relatively quickly to a downturn in the local economy or to the closing of a
major employer in the area.
Some states regulate the relationship of an owner and its
tenants at a multifamily rental property. Among other things, these states may--
- require written leases;
- require good cause for eviction;
- require disclosure of fees;
- prohibit unreasonable rules;
- prohibit retaliatory evictions;
- prohibit restrictions on a resident's choice of unit
vendors;
- limit the bases on which a landlord may increase
rent; or
- prohibit a landlord from terminating a tenancy solely
by reason of the sale of the owner's building.
Apartment building owners have been the subject of suits under
state Unfair and Deceptive Practices Acts and other general consumer protection
statutes for coercive, abusive or unconscionable leasing and sales practices.
Some counties and municipalities also impose rent control
regulations on apartment buildings. These regulations may limit rent increases
to--
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- fixed percentages,
- percentages of increases in the consumer price index,
- increases set or approved by a governmental agency,
or
- increases determined through mediation or binding
arbitration.
In many cases, the rent control laws do not provide for
decontrol of rental rates upon vacancy of individual units. Any limitations on a
landlord's ability to raise rents at a multifamily rental property may impair
the landlord's ability to repay a mortgage loan secured by the property or to
meet operating costs.
Some multifamily rental properties are subject to land use
restrictive covenants or contractual covenants in favor of federal or state
housing agencies. These covenants generally require that a minimum number or
percentage of units be rented to tenants who have incomes that are substantially
lower than median incomes in the area or region. These covenants may limit the
potential rental rates that may be charged at a multifamily rental property, the
potential tenant base for the property or both. An owner may subject a
multifamily rental property to these covenants in exchange for tax credits or
rent subsidies. When the credits or subsidies cease, net operating income will
decline.
Some mortgage loans securing the offered bonds will, in turn,
be secured by--
- the related borrower's interest in multiple units in
a residential condominium project, and
- the related voting rights in the owners' association
for that project.
Due to the nature of condominiums, a default on any of those mortgage loans will
not allow the related special servicer the same flexibility in realizing on the
real property collateral as is generally available with respect to multifamily
rental properties that are not condominiums. The rights of other unit owners,
the governing documents of the owners' association and the state and local laws
applicable to condominiums must be considered and respected. Consequently,
servicing and realizing upon the collateral for those mortgage loans could
subject the related trust estate to greater delay, expense and risk than a loan
secured by a multifamily rental property that is not a condominium.
COOPERATIVELY-OWNED APARTMENT BUILDINGS. Some multifamily
properties are owned or leased by cooperative corporations. In general, each
shareholder in the corporation is entitled to occupy a particular apartment unit
under to a long-term proprietary lease or occupancy agreement.
A tenant/shareholder of a cooperative corporation must make a
monthly maintenance payment to the corporation. The monthly maintenance payment
represents a tenant/shareholder's PRO RATA share of the corporation's--
- mortgage loan payments,
- real property taxes,
- maintenance expenses, and
- other capital and ordinary expenses of the property.
These monthly maintenance payments are in addition to any payments of principal
and interest the tenant/shareholder must make on any loans of the
tenant/shareholder secured by its shares in the corporation.
A cooperative corporation is directly responsible for building
maintenance and payment of real estate taxes and hazard and liability insurance
premiums. A cooperative corporation's ability to meet debt service obligations
on a mortgage loan secured by, and to pay all other operating expenses of, the
cooperatively owned property depends primarily upon the receipt of--
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- maintenance payments from the tenant/shareholders,
and
- any rental income from units or commercial space that
the cooperative corporation might control.
A cooperative corporation may have to impose special
assessments on the tenant/shareholders in order to pay unanticipated
expenditures. Accordingly, a cooperative corporation is highly dependent on the
financial well being of its tenant/shareholders. A cooperative corporation's
ability to pay the amount of any balloon payment due at the maturity of a
mortgage loan secured by the cooperatively owned property depends primarily on
its ability to refinance the property.
In a typical cooperative conversion plan, the owner of a
rental apartment building contracts to sell the building to a newly formed
cooperative corporation. Shares are allocated to each apartment unit by the
owner or sponsor. The current tenants have a specified period to subscribe at
prices discounted from the prices to be offered to the public after that period.
As part of the consideration for the sale, the owner or sponsor receives all the
unsold shares of the cooperative corporation. In general the sponsor controls
the corporation's board of directors and management for a limited period of
time. If the sponsor holds the shares allocated to a large number of apartment
units, the lender on a mortgage loan secured by a cooperatively owned property
may be adversely affected by a decline in the creditworthiness of the sponsor.
Many cooperative conversion plans are non-eviction plans.
Under a non-eviction plan, a tenant at the time of conversion who chooses not to
purchase shares is entitled to reside in its apartment unit as a subtenant from
the owner of the shares allocated to that unit. Any applicable rent control or
rent stabilization laws would continue to be applicable to the subtenancy. In
addition, the subtenant may be entitled to renew its lease for an indefinite
number of years with continued protection from rent increases above those
permitted by any applicable rent control and rent stabilization laws. The
owner/shareholder is responsible for the maintenance payments to the cooperative
corporation without regard to whether it receives rent from the subtenant or
whether the rent payments are lower than maintenance payments on the unit.
Newly-formed cooperative corporations typically have the greatest concentration
of non-tenant/shareholders.
RETAIL PROPERTIES. The term "retail property" encompasses a
broad range of properties at which businesses sell consumer goods and other
products and provide various entertainment, recreational or personal services to
the general public. Some examples of retail properties include:
- shopping centers
- factory outlet centers
- malls
- automotive sales and service centers
- consumer oriented businesses
- department stores
- grocery stores
- convenience stores
- specialty shops
- gas stations
- movie theaters
- fitness centers
- bowling alleys
- salons
- dry cleaners
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Unless owner occupied, retail properties generally derive all
or a substantial percentage of their income from lease payments from commercial
tenants. Therefore, it is important for the owner of a retail property to
attract and keep tenants, particularly significant tenants, that are able to
meet their lease obligations. In order to attract tenants, the owner of a retail
property may be required--
- to lower rents;
- to grant a potential tenant a free rent or reduced
rent period;
- to improve the condition of the property generally;
or
- to make at its own expense, or grant a rent abatement
to cover, tenant improvements for a potential tenant.
A prospective tenant will also be interested in the number and
type of customers that it will be able to attract at a particular retail
property. The ability of a tenant at a particular retail property to attract
customers will be affected by a number of factors related to the property and
the surrounding area, including--
- competition from other retail properties;
- perceptions regarding the safety, convenience and
attractiveness of the property;
- perceptions regarding the safety of the surrounding
area;
- demographics of the surrounding area;
- the strength and stability of the local, regional and
national economies;
- traffic patterns and access to major thoroughfares;
- the visibility of the property;
- availability of parking;
- the particular mixture of the goods and services
offered at the property;
- customer tastes, preferences and spending patterns;
and
- the drawing power of other tenants.
The success of a retail property is often dependent on the
success of its tenants' businesses. A significant component of the total rent
paid by tenants of retail properties is often tied to a percentage of gross
sales or revenues. Declines in sales or revenues of the tenants will likely
cause a corresponding decline in percentage rents and/or impair the tenants'
ability to pay their rent or other occupancy costs. A default by a tenant under
its lease could result in delays and costs in enforcing the landlord's rights.
Retail properties would be directly and adversely affected by a decline in the
local economy and reduced consumer spending.
Repayment of a mortgage loan secured by a retail property will
be affected by the expiration of space leases at the property and the ability of
the borrower to renew or relet the space on comparable terms. Even if vacant
space is successfully relet, the costs associated with reletting, including
tenant improvements, leasing commissions and free rent, may be substantial and
could reduce cash flow from a retail property.
The presence or absence of an anchor tenant in a
multi-tenanted retail property can be important. Anchor tenants play a key role
in generating customer traffic and making the center desirable for other
tenants. An anchor tenant is, in general, a retail tenant whose space is
substantially larger in size than that of other tenants at the same retail
property and whose operation is vital in attracting customers to the property.
At some retail properties, the anchor tenant owns the space it occupies. In
those cases where the property owner does not control the space occupied by the
anchor tenant, the property owner may not be able to take actions with respect
to the space that it otherwise typically would, such as granting concessions to
retain an anchor tenant or removing an ineffective anchor tenant. In some cases,
an anchor tenant may cease to operate at the property, thereby leaving its space
unoccupied even though it continues to own or pay rent on the vacant space. If
an anchor tenant ceases operations at a retail property, other tenants at the
property may be entitled to terminate their leases prior to the scheduled
termination date or to pay rent at a reduced rate for the remaining term of the
lease.
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Various factors will adversely affect the economic performance
of an anchored retail property, including:
- an anchor tenant's failure to renew its lease;
- termination of an anchor tenant's lease;
- the bankruptcy or economic decline of an anchor
tenant or a self-owned anchor;
- the cessation of the business of a self-owned anchor
or of an anchor tenant, notwithstanding its continued
ownership of the previously occupied space or its
continued payment of rent, as the case may be; or
- a loss of an anchor tenant's ability to attract
shoppers.
Retail properties may also face competition from sources
outside a given real estate market or with lower operating costs. For example,
all of the following compete with more traditional department stores and
specialty shops for consumer dollars:
- factory outlet centers;
- discount shopping centers and clubs;
- catalogue retailers;
- television shopping networks and programs;
- internet web sites; and
- telemarketing.
Similarly, home movie rentals and pay-per-view movies provide
alternate sources of entertainment to movie theaters. Continued growth of these
alternative retail outlets and entertainment sources, which are often
characterized by lower operating costs, could adversely affect the rents
collectible at retail properties.
Gas stations, automotive sales and service centers and dry
cleaners also pose unique environmental risks because of the nature of their
businesses and the types of products used or sold in those businesses.
OFFICE PROPERTIES. Factors affecting the value and operation
of an office property include:
- the number and quality of the tenants, particularly
significant tenants, at the property;
- the physical attributes of the building in relation
to competing buildings;
- the location of the property 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 or property
owners by cities or suburbs adjacent to or near where
the building is located;
- local competitive conditions, such as the supply of
office space or the existence or construction of new
competitive office buildings;
- the quality and philosophy of building management;
- access to mass transportation; and
- changes in zoning laws.
Office properties may be adversely affected by an economic
decline in the business operated by their tenants. The risk associated with that
economic decline is increased if revenue is dependent on a single tenant or if
there is a significant concentration of tenants in a particular business or
industry.
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Office properties are also subject to competition with other
office properties in the same market. Competitive factors affecting an office
property include:
- rental rates;
- the building's age, condition and design, including
floor sizes and layout;
- access to public transportation and availability of
parking; and
- amenities offered to its tenants, including
sophisticated building systems, such as fiber optic
cables, satellite communications or other base
building technological features.
The cost of refitting office space for a new tenant is often
higher than for other property types.
The success of an office property also depends on the local
economy. Factors influencing a company's decision to locate in a given area
include:
- the cost and quality of labor;
- tax incentives; and
- quality of life matters, such as schools and cultural
amenities.
The strength and stability of the local or regional economy
will affect an office property's ability to attract stable tenants on a
consistent basis. A central business district may have a substantially different
economy from that of a suburb.
HOSPITALITY PROPERTIES. Hospitality properties may involve
different types of hotels and motels, including:
- full service hotels;
- resort hotels with many amenities;
- limited service hotels;
- hotels and motels associated with national or
regional franchise chains;
- hotels that are not affiliated with any franchise
chain but may have their own brand identity; and
- other lodging facilities.
Factors affecting the economic performance of a hospitality
property include:
- the location of the property and its proximity to
major population centers or attractions;
- the seasonal nature of business at the property;
- the level of room rates relative to those charged by
competitors;
- quality and perception of the franchise affiliation;
- economic conditions, either local, regional or
national, which may limit the amount that can be
charged for a room and may result in a reduction in
occupancy levels;
- the existence or construction of competing
hospitality properties;
- nature and quality of the services and facilities;
- financial strength and capabilities of the owner and
operator;
- the need for continuing expenditures for modernizing,
refurbishing and maintaining existing facilities;
- increases in operating costs, which may not be offset
by increased room rates;
- the property's dependence on business and commercial
travelers and tourism; and
- changes in travel patterns caused by changes in
access, energy prices, labor strikes, relocation of
highways, the reconstruction of additional highways
or other factors.
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Because limited service hotels and motels are relatively quick
and inexpensive to construct and may quickly reflect a positive value, an
over-building of these hotels and motels could occur in any given region, which
would likely adversely affect occupancy and daily room rates. Further, because
rooms at hospitality properties are generally rented for short periods of time,
hospitality properties tend to be more sensitive to adverse economic conditions
and competition than many other types of commercial properties. Additionally,
the revenues some hospitality properties, particularly those located in regions
whose economies depend upon tourism, may be highly seasonal in nature.
Hospitality properties may be operated under franchise
agreements. The continuation of a franchise is typically subject to specified
operating standards and other terms and conditions. The franchisor periodically
inspects its licensed properties to confirm adherence to its operating
standards. The failure of the hospitality property to maintain those standards
or adhere to those other terms and conditions could result in the loss or
cancellation of the franchise license. It is possible that the franchisor could
condition the continuation of a franchise license on the completion of capital
improvements or the making of capital expenditures that the owner of the
hospitality property determines are too expensive or are otherwise unwarranted
in light of the operating results or prospects of the property. In that event,
the owner of the hospitality property may elect to allow the franchise license
to lapse. In any case, if the franchise is terminated, the owner of the
hospitality property may seek to obtain a suitable replacement franchise or to
operate property independently of a franchise license. The loss of a franchise
license could have a material adverse effect upon the operations or value of the
hospitality property because of the loss of associated name recognition,
marketing support and centralized reservation systems provided by the
franchisor.
The viability of any hospitality property that is a franchise
of a national or a regional hotel or motel chain is dependent upon:
- 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. The consent of the franchisor would be required for the continued
use of the franchise license by the hospitality property following a
foreclosure. Conversely, a lender may be unable to remove a franchisor that it
desires to replace following a foreclosure. Further, in the event of a
foreclosure on a hospitality property, the lender or other purchaser of the
hospitality property may not be entitled to the rights under any associated
liquor license. That party would be required to apply in its own right for a new
liquor license. There can be no assurance that a new license could be obtained
or that it could be obtained promptly.
CASINO PROPERTIES. Factors affecting the economic performance
of a casino property include:
- location, including proximity to or easy access from
major population centers;
- appearance;
- economic conditions, either local, regional or
national, which may limit the amount of disposable
income that potential patrons may have for gambling;
- the existence or construction of competing casinos;
- dependence on tourism; and
- local or state governmental regulation.
Competition among major casinos may involve attracting patrons
by --
- providing alternate forms of entertainment, such as
performers and sporting events, and
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- offering low-priced or free food and lodging. Casino
owners may expend substantial sums to modernize,
refurbish and maintain existing facilities.
Because of their dependence on disposable income of patrons,
casino properties are likely to respond quickly to a downturn in the economy.
To avoid criminal influence, the ownership and operation of
casino properties is often subject to local or state governmental regulation. A
government agency or authority may have jurisdiction over or influence with
respect to the foreclosure of a casino property or the bankruptcy of its owner
or operator. In some jurisdictions, it may be necessary to receive governmental
approval before foreclosing, thereby resulting in substantial delays to a
lender. Gaming licenses are not transferable, including in connection with a
foreclosure. There can be no assurance that a lender or another purchaser in
foreclosure or otherwise will be able to obtain the requisite approvals to
continue operating the foreclosed property as a casino.
Any given state or municipality that currently allows
legalized gambling could pass legislation banning it.
The loss of a gaming license for any reason would have a
material adverse effect on the value of a casino property.
HEALTH CARE-RELATED PROPERTIES. Health-care related properties
include:
- hospitals;
- skilled nursing facilities;
- nursing homes;
- congregate care facilities; and
- in some cases, assisted living centers and housing
for seniors.
Health care-related facilities, particularly nursing homes,
may receive a substantial portion of their revenues from government
reimbursement programs, primarily Medicaid and Medicare. Medicaid and Medicare
are subject to:
- statutory and regulatory changes;
- retroactive rate adjustments;
- administrative rulings;
- policy interpretations;
- delays by fiscal intermediaries; and
- government funding restrictions.
All of the foregoing can adversely affect revenues from the
operation a health care-related facility. Moreover, governmental payors have
employed cost-containment measures that limit payments to health care providers.
In addition, there are currently under consideration various proposals for
national health care relief that could further limit these payments.
Providers of long-term nursing care and other medical services
are highly regulated by federal, state and local law. They are subject to
numerous factors which can increase the cost of operation, limit growth and, in
extreme cases, require or result in suspension or cessation of operations,
including:
- federal and state licensing requirements;
- facility inspections;
- rate setting;
- reimbursement policies; and
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- laws relating to the adequacy of medical care,
distribution of pharmaceuticals, use of equipment,
personnel operating policies and maintenance of and
additions to facilities and services.
Under applicable federal and state laws and regulations,
Medicare and Medicaid reimbursements generally may not be made to any person
other than the provider who actually furnished the related material goods and
services. Accordingly, in the event of foreclosure on a health care-related
facility, neither a lender nor other subsequent lessee or operator of the
property would generally be entitled to obtain from federal or state governments
any outstanding reimbursement payments relating to services furnished at the
property prior to foreclosure. Furthermore, in the event of foreclosure, there
can be no assurance that a lender or other purchaser in a foreclosure sale would
be entitled to the rights under any required licenses and regulatory approvals.
The lender or other purchaser may have to apply in its own right for those
licenses and approvals. There can be no assurance that a new license could be
obtained or that a new approval would be granted.
Health care-related facilities are generally special purpose
properties that could not be readily converted to general residential, retail or
office use. This will adversely affect their liquidation value. Furthermore,
transfers of health care-related facilities are subject to regulatory approvals
under state, and in some cases federal, law not required for transfers of most
other types of commercial properties.
INDUSTRIAL PROPERTIES. Industrial properties may be adversely
affected by reduced demand for industrial space occasioned by a decline in a
particular industry segment and/or by a general slowdown in the economy. In
addition, an industrial property that suited the particular needs of its
original tenant may be difficult to relet to another tenant or may become
functionally obsolete relative to newer properties.
The value and operation of an industrial property depends on:
- location of the property, the desirability of which
in a particular instance may depend on--
1. availability of labor services,
2. proximity to supply sources and customers,
and
3. accessibility to various modes of
transportation and shipping, including
railways, roadways, airline terminals and
ports;
- building design of the property, the desirability of
which in a particular instance may depend on--
1. ceiling heights,
2. column spacing,
3. number and depth of loading bays,
4. divisibility,
5. floor loading capacities,
6. truck turning radius,
7. overall functionality, and
8. adaptability of the property, because
industrial tenants often need space that is
acceptable for highly specialized
activities; and
- the quality and creditworthiness of individual
tenants, because industrial properties frequently
have higher tenant concentrations.
Industrial properties are generally special purpose properties
that could not be readily converted to general residential, retail or office
use. This will adversely affect their liquidation value.
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WAREHOUSE, MINI-WAREHOUSE AND SELF-STORAGE FACILITIES.
Warehouse, mini-warehouse and self-storage properties are considered vulnerable
to competition because both acquisition costs and break-even occupancy are
relatively low. In addition, it would require substantial capital expenditures
to convert a warehouse, mini-warehouse or self-storage property to an
alternative use. This will materially impair the liquidation value of the
property if its operation for storage purposes becomes unprofitable due to
decreased demand, competition, age of improvements or other factors.
Successful operation of a warehouse, mini-warehouse or
self-store property depends on--
- building design;
- location and visibility;
- tenant privacy;
- efficient access to the property;
- proximity to potential users, including apartment
complexes or commercial users;
- services provided at the property, such as security;
- age and appearance of the improvements; and
- quality of management.
RESTAURANTS AND TAVERNS. Factors affecting the economic
viability of individual restaurants, taverns and other establishments that are
part of the food and beverage service industry include:
- competition from facilities having businesses similar
to a particular restaurant or tavern;
- perceptions by prospective customers of safety,
convenience, services and attractiveness;
- the cost, quality and availability of food and
beverage products;
- negative publicity, resulting from instances of food
contamination, food-borne illness and similar events;
- changes in demographics, consumer habits and traffic
patterns;
- the ability to provide or contract for capable
management; and
- retroactive changes to building codes, similar
ordinances and other legal requirements.
Adverse economic conditions, whether local, regional or
national, may limit the amount that may be charged for food and beverages and
the extent to which potential customers dine out. Because of the nature of the
business, restaurants and taverns tend to respond to adverse economic conditions
more quickly than do many other types of commercial properties. Furthermore, the
transferability of any operating, liquor and other licenses to an entity
acquiring a bar or restaurant, either through purchase or foreclosure, is
subject to local law requirements.
The food and beverage service industry is highly competitive.
The principal means of competition are--
- segment,
- product,
- price,
- value,
- quality,
- service,
- convenience,
- location, and
- the nature and condition of the restaurant facility.
A restaurant or tavern operator competes with the operators of
comparable establishments in the area in which its restaurant or tavern is
located. Other restaurants could have--
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- lower operating costs,
- more favorable locations,
- more effective marketing,
- more efficient operations, or
- better facilities.
The location and condition of a particular restaurant or
tavern will affect the number of customers and, to an extent, the prices that
may be charged. The characteristics of an area or neighborhood in which a
restaurant or tavern is located may change over time or in relation to competing
facilities. Also, the cleanliness and maintenance at a restaurant or tavern will
affect its appeal to customers. In the case of a regionally- or nationally-known
chain restaurant, there may be costly expenditures for renovation, refurbishment
or expansion, regardless of its condition.
Factors affecting the success of a regionally- or
nationally-known chain restaurant include:
- actions and omissions of any franchisor, including
management practices that--
1. adversely affect the nature of the business,
or
2. require renovation, refurbishment, expansion
or other expenditures;
- the degree of support provided or arranged by the
franchisor, including its franchisee organizations
and third-party providers of products or services;
and
- the bankruptcy or business discontinuation of the
franchisor or any of its franchisee organizations or
third-party providers.
Chain restaurants may be operated under franchise agreements.
Those agreements typically do not contain provisions protective of lenders. A
borrower's rights as franchisee typically may be terminated without informing
the lender, and the borrower may be precluded from competing with the franchisor
upon termination. In addition, a lender that acquires title to a restaurant site
through foreclosure or similar proceedings may be restricted in the use of the
site or may be unable to succeed to the rights of the franchisee under the
related franchise agreement. The transferability of a franchise may be subject
to other restrictions. Also, federal and state franchise regulations may impose
additional risk, including the risk that the transfer of a franchise acquired
through foreclosure or similar proceedings may require registration with
governmental authorities or disclosure to prospective transferees.
MANUFACTURED HOUSING COMMUNITIES, MOBILE HOME PARKS AND
RECREATIONAL VEHICLE PARKS. Manufactured housing communities and mobile home
parks consist of land that is divided into "spaces" or "home sites" that are
primarily leased to owners of the individual mobile homes or other housing
units. The home owner often invests in site-specific improvements such as
carports, steps, fencing, skirts around the base of the home, and landscaping.
The land owner typically provides private roads within the park, common
facilities and, in many cases, utilities. Due to relocation costs and, in some
cases, demand for homesites, the value of a mobile home or other housing unit in
place in a manufactured housing community or mobile home park is generally
higher, and can be significantly higher, than the value of the same unit not
placed in a manufactured housing community or mobile home park. As a result, a
well-operated manufactured housing community or mobile home park that has
achieved stabilized occupancy is typically able to maintain occupancy at or near
that level. For the same reason, a lender that provided financing for the home
of a tenant who defaulted in his or her space rent generally has an incentive to
keep rental payments current until the home can be resold in place, rather than
to allow the unit to be removed from the park. In general, the individual mobile
homes and other housing units will not constitute collateral for a mortgage loan
securing a series of offered bonds.
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Recreational vehicle parks lease spaces primarily or
exclusively for motor homes, travel trailers and portable truck campers,
primarily designed for recreational, camping or travel use. In general, parks
that lease recreational vehicle spaces can be viewed as having a less stable
tenant population than parks occupied predominantly by mobile homes. However, it
is not unusual for the owner of a recreational vehicle to leave the vehicle at
the park on a year-round basis or to use the vehicle as low cost housing and
reside in the park indefinitely.
Factors affecting the successful operation of a manufactured
housing community, mobile home park or recreational vehicle park include:
- the number of comparable competing properties in the
local market;
- the age, appearance and reputation of the property;
- the quality of management; and
- the types of facilities and services it provides.
Manufactured housing communities and mobile home parks also
compete against alternative forms of residential housing, including--
- multifamily rental properties,
- cooperatively-owned apartment buildings,
- condominium complexes, and
- single-family residential developments.
Recreational vehicle parks also compete against alternative
forms of recreation and short-term lodging, such as staying at a hotel at the
beach.
Manufactured housing communities, mobile home parks and
recreational vehicle parks are special purpose properties that could not be
readily converted to general residential, retail or office use. This will
adversely affect the liquidation value of the property if its operation as a
manufactured housing community, mobile home park or recreational vehicle park,
as the case may be, becomes unprofitable due to competition, age of the
improvements or other factors.
Some states regulate the relationship of an owner of a
manufactured housing community or mobile home park and its tenants in a manner
similar to the way they regulate the relationship between a landlord and tenant
at a multifamily rental property. In addition, some states also regulate changes
in the use of a manufactured housing community or mobile home park and require
that the owner give written notice to its tenants a substantial period of time
prior to the projected change.
In addition to state regulation of the landlord-tenant
relationship, numerous counties and municipalities impose rent control on
manufactured housing communities and mobile home parks. These ordinances may
limit rent increases to:
- fixed percentages,
- percentages of increases in the consumer price index,
- increases set or approved by a governmental agency,
or
- increases determined through mediation or binding
arbitration.
In many cases, the rent control laws either do not permit vacancy decontrol or
permit vacancy decontrol only in the relatively rare event that the mobile home
or manufactured housing unit is removed from the homesite. Local authority to
impose rent control on manufactured housing communities and mobile home parks is
pre-empted by state law in some states and rent control is not imposed at the
state level in those states. In some states,
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however, local rent control ordinances are not pre-empted for tenants having
short-term or month-to-month leases, and properties there may be subject to
various forms of rent control with respect to those tenants.
RECREATIONAL AND RESORT PROPERTIES. Any mortgage loan securing
a series of offered bonds may, in turn, be secured by a golf course, marina, ski
resort, amusement park or other property used for recreational purposes or as a
resort. Factors affecting the economic performance of a property of this type
include:
- the location and appearance of the property;
- the appeal of the recreational activities offered;
- the existence or construction of competing
properties, whether are not they offer the same
activities;
- the need to make capital expenditures to maintain,
refurbish, improve and/or expand facilities in order
to attract potential patrons;
- geographic location and dependence on tourism;
- changes in travel patterns caused by changes in
energy prices, strikes, location of highways,
construction of additional highways and similar
factors;
- seasonality of the business, which may cause periodic
fluctuations in operating revenues and expenses;
- sensitivity to weather and climate changes; and
- local, regional and national economic conditions.
A marina or other recreational or resort property located next
to water will also be affected by various statutes and government regulations
that govern the use of, and construction on, rivers, lakes and other waterways.
Because of the nature of the business, recreational and resort
properties tend to respond to adverse economic conditions more quickly than do
many other types of commercial properties.
Recreational and resort properties are generally special
purpose properties that are not readily convertible to alternative uses. This
will adversely affect their liquidation value.
ARENAS AND STADIUMS. The success of an arena or stadium
generally depends on its ability to attract patrons to a variety of events,
including:
- sporting events;
- musical events;
- theatrical events;
- animal shows; and/or
- circuses.
The ability to attract patrons is dependent on, among others,
the following factors as:
- the appeal of the particular event;
- the cost of admission;
- perceptions by prospective patrons of the safety,
convenience, services and attractiveness of the arena
or stadium;
- perceptions by prospective patrons of the safety of
the surrounding area; and
- the alternative forms of entertainment available in
the particular locale.
In some cases, an arena's or stadium's success will depend on
its ability to attract and keep a sporting team as a tenant. An arena or stadium
may become unprofitable, or unacceptable to a tenant of
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that type, due to decreased attendance, competition and age of improvements.
Often, substantial expenditures must be made to modernize, refurbish and/or
maintain existing facilities.
Arenas and stadiums are special purpose properties which
cannot be readily convertible to alternative uses. This will adversely affect
their liquidation value.
CHURCHES AND OTHER RELIGIOUS FACILITIES. Churches and other
religious facilities generally depend on charitable donations to meet expenses
and pay for maintenance and capital expenditures. The extent of those donations
is dependent on the attendance at any particular religious facility and the
extent to which attendees are prepared to make donations, which is influenced by
a variety of social, political and economic factors. Donations may be adversely
affected by economic conditions, whether local, regional or national.
Religious facilities are special purpose properties that are
not readily convertible to alternative uses. This will adversely affect their
liquidation value.
PARKING LOTS AND GARAGES. The primary source of income for
parking lots and garages is the rental fees charged for parking spaces. Factors
affecting the success of a parking lot or garage include:
- the number of rentable parking spaces and rates
charged;
- the location of the lot or garage and, in particular,
its proximity to places where large numbers of people
work, shop or live;
- the amount of alternative parking spaces in the area;
- the availability of mass transit; and
- the perceptions of the safety, convenience and
services of the lot or garage.
UNIMPROVED LAND. The value of unimproved land is largely a
function of its potential use. This may depend on--
- its location,
- its size,
- the surrounding neighborhood, and
- local zoning laws.
DEFAULT AND LOSS CONSIDERATIONS WITH RESPECT TO COMMERCIAL AND
MULTIFAMILY MORTGAGE LOANS. Mortgage loans secured by liens on income-producing
properties are substantially different from mortgage loans made on the security
of owner-occupied single-family homes. The repayment of a loan secured by a lien
on an income-producing property is typically dependent upon --
- the successful operation of the property, and
- its ability to generate income sufficient to make
payments on the loan.
This is particularly true because most or all of the mortgage loans securing the
offered bonds will be nonrecourse loans.
The debt service coverage ratio of a multifamily or commercial
mortgage loan is an important measure of the likelihood of default on the loan.
In general, the "debt service coverage ratio" of a multifamily or commercial
mortgage loan at any given time is the ratio of--
- the amount of income derived or expected to be
derived from the related real property for a
twelve-month period that is available to pay debt
service, to
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- the annualized scheduled payments of principal and/or
interest on the mortgage loan and any other senior
loans that are secured by the related real property.
The amount described in the first bullet point of the preceding sentence is
often a highly subjective number based on a variety of assumptions regarding,
and adjustments to, revenues and expenses with respect to the related real
property. We will provide a more detailed discussion of its calculation in the
related prospectus supplement.
The cash flow generated by a multifamily or commercial
property will generally fluctuate over time and may or may not be sufficient to
make--
- the loan payments on the related mortgage loan,
- cover operating expenses, and
- fund capital improvements at any given time.
Operating revenues of a nonowner occupied, income- producing property may be
affected by the condition of the applicable real estate market and/or area
economy. Properties leased, occupied or used on a short-term basis, such as--
- some health care-related facilities,
- hotels and motels,
- recreational vehicle parks, and mini-warehouse and
self-storage facilities,
tend to be affected more rapidly by changes in market or business conditions
than do properties typically leased for longer periods, such as--
- warehouses,
- retail stores,
- office buildings, and
- industrial facilities.
Some commercial properties may be owner-occupied or leased to
a small number of tenants. Accordingly, the operating revenues may depend
substantially on the financial condition of the borrower or one or a few
tenants. Mortgage loans secured by liens on owner-occupied and single tenant
properties may pose a greater likelihood of default and loss than loans secured
by liens on multifamily properties or on multi-tenant commercial properties.
Increases in property operating expenses can increase the
likelihood of a borrower default on a multifamily or commercial mortgage loan
secured by the property. Increases in property operating expenses may result
from:
- increases in energy costs and labor costs;
- increases in interest rates and real estate tax
rates; and
- changes in governmental rules, regulations and fiscal
policies.
Some net leases of commercial properties may provide that the
lessee, rather than the borrower/landlord, is responsible for payment of
operating expenses. However, a net lease will result in stable net operating
income to the borrower/landlord only if the lessee is able to pay the increased
operating expense while also continuing to make rent payments.
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Lenders also look to the loan-to-value ratio of a mortgage
loan as a factor in evaluating the likelihood of loss if a property is
liquidated following a default. In general, the loan-to-value ratio of a
multifamily or commercial mortgage loan at any given time is the ratio,
expressed as a percentage, of--
- the then outstanding principal balance of the
mortgage loan and any other senior loans that are
secured by the related real property, to
- the estimated value of the related real property
based on an appraisal, a cash flow analysis, a recent
sales price or another method or benchmark of
valuation.
A low loan-to-value ratio means the borrower has a large
amount of its own equity in the multifamily or commercial property that secures
its loan. In these circumstances--
- the borrower has a greater incentive to perform under
the terms of the related mortgage loan in order to
protect that equity, and
- the lender has greater protection against loss on
liquidation following a borrower default.
Loan-to-value ratios are not necessarily an accurate measure
of the likelihood of liquidation loss in a pool of multifamily and commercial
mortgage loans. For example, the value of a multifamily or commercial property
as of the date of initial issuance of a series of offered bonds may be less than
the estimated value determined at loan origination. The value of any real
property, in particular a multifamily or commercial property, will likely
fluctuate from time to time. Moreover, even a current appraisal is not
necessarily a reliable estimate of value. Appraised values of income-producing
properties are generally based on--
- the market comparison method, which takes into
account the recent resale value of comparable
properties at the date of the appraisal;
- the cost replacement method, which takes into account
the cost of replacing the property at the date of the
appraisal;
- the income capitalization method, which takes into
account the property's projected net cash flow; or
- a selection from the values derived from the
foregoing methods.
Each of these appraisal methods presents analytical
difficulties. For example,
- 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 and discount
rate.
If more than one appraisal method is used and significantly different results
are produced, an accurate determination of value and, correspondingly, a
reliable analysis of the likelihood of default and loss, is even more difficult.
The value of a multifamily or commercial property will be
affected by property performance. As a result, if a multifamily or commercial
mortgage loan defaults because the income generated by the related property is
insufficient to pay operating costs and expenses as well as debt service, then
the value of the property will decline and a liquidation loss may occur.
We believe that the foregoing considerations are important
factors that generally distinguish mortgage loans secured by liens on
income-producing real estate from single-family mortgage loans. However, the
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originators of the mortgage loans directly or indirectly backing a series of
offered bonds may not have considered all of those factors for all or any of
those loans.
See "Risk Factors--Repayment of a Commercial or Multifamily
Mortgage Loan Depends Upon the Performance and Value of the Underlying Real
Property, Which May Decline Over Time, and the Related Borrower's Ability to
Refinance the Property, of Which There is no Assurance."
PAYMENT PROVISIONS OF THE MORTGAGE LOANS. Each of the mortgage
loans securing a series of offered bonds will have the following features:
- an original term to maturity of not more than
approximately 40 years; and
- scheduled payments of principal, interest or both, to
be made on specified dates, that occur monthly,
bi-monthly, quarterly, semi-annually, annually or at
some other interval.
A mortgage loan securing a series of offered bonds may also
include terms that:
- provide for the accrual of interest at a mortgage
interest rate that is fixed over its term, that
resets on one or more specified dates or that
otherwise adjusts from time to time;
- provide for the accrual of interest at a mortgage
interest rate that may be converted at the borrower's
election from an adjustable to a fixed interest rate
or from a fixed to an adjustable interest rate;
- provide for no accrual of interest;
- provide for level payments to stated maturity, for
payments that reset in amount on one or more
specified dates or for payments that otherwise adjust
from time to time to accommodate changes in the
coupon rate or to reflect the occurrence of specified
events;
- be fully amortizing or, alternatively, may be
partially amortizing or nonamortizing, with a
substantial payment of principal due on its stated
maturity date;
- permit the negative amortization or deferral of
accrued interest;
- permit defeasance and the release of real property
collateral in connection with that defeasance; and/or
- prohibit some or all voluntary prepayments or require
payment of a premium, fee or charge in connection
with those prepayments.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS. We will
describe in the related prospectus supplement the characteristics of the
mortgage loans that will secure a series of offered bonds. In general, we will
provide in the related prospectus supplement, among other items, the following
information on the particular mortgage loans securing a series of offered bonds:
- the total outstanding principal balance and the
largest, smallest and average outstanding principal
balance of the mortgage loans;
- the type or types of property that provide security
for repayment of the mortgage loans;
- the earliest and latest origination date and maturity
date of the mortgage loans;
- the original and remaining terms to maturity of the
mortgage loans, or the range of each of those terms
to maturity, and the weighted average original and
remaining terms to maturity of the mortgage loans;
- loan-to-value ratios of the mortgage loans either at
origination or as of a more recent date, or the range
of those loan-to-value ratios, and the weighted
average of those loan-to-value ratios;
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- the mortgage interest rates of the mortgage loans, or
the range of those mortgage interest rates, and the
weighted average mortgage interest rate of the
mortgage loans;
- if any mortgage loans have adjustable mortgage
interest rates, the index or indices upon which the
adjustments are based, the adjustment dates, the
range of gross margins and the weighted average gross
margin, and any limits on mortgage interest rate
adjustments at the time of any adjustment and over
the life of the loan;
- information on the payment characteristics of the
mortgage loans, including applicable prepayment
restrictions;
- debt service coverage ratios of the mortgage loans
either at origination or as of a more recent date, or
the range of those debt service coverage ratios, and
the weighted average of those debt service coverage
ratios; and
- the geographic distribution of the properties
securing the mortgage loans on a state-by-state
basis.
If we are unable to provide the specific information described
in the preceding paragraph at the time a series of offered bonds is initially
offered, we will provide--
- more general information in the related prospectus
supplement, and
- specific information in a report which will be filed
with the SEC as part of a Current Report on Form 8-K
within 15 days following the issuance of those bonds.
If any mortgage loan, or group of related mortgage loans,
securing a series of offered bonds represents a material concentration of credit
risk, we will include in the related prospectus supplement financial statements
or other financial information on the related real property or properties.
MORTGAGE-BACKED SECURITIES
The mortgage backed-securities securing a series of offered
bonds may include:
- mortgage participations, mortgage pass-through
certificates, collateralized mortgage obligations or
other mortgage-backed securities that are not insured
or guaranteed by any governmental agency or
instrumentality, or
- certificates issued and/or insured or guaranteed by
Freddie Mac, Fannie Mae, Ginnie Mae, Farmer Mac or
another federal or state governmental agency or
instrumentality.
In addition, each of those mortgage-backed securities will
directly or indirectly evidence an interest in, or be secured by a pledge of,
multifamily and/or commercial mortgage loans.
Each mortgage-backed security included as part of the mortgage
collateral for a series of offered bonds--
- will have been registered under the Securities Act of
1933, as amended, or
- will be exempt from the registration requirements of
that Act, or
- will have been held for at least the holding period
specified in Rule 144(k) under that Act, or
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- would otherwise be able to be resold by us publicly
without registration under that Act.
We will describe in the related prospectus supplement the
characteristics of the mortgage-backed securities that will be included as part
of the mortgage collateral for a series of offered bonds. In general, we will
provide in the related prospectus supplement, among other items, the following
information on the particular mortgage-backed securities included as part of the
mortgage collateral for a series of offered bonds:
- the initial and outstanding principal amount(s) and
type of the securities;
- the original and remaining term(s) to stated maturity
of the securities;
- the pass-through or bond rate(s) of the securities or
the formula for determining those rate(s);
- the payment characteristics of the securities;
- the identity of the issuer(s), servicer(s) and
trustee(s) for the securities;
- a description of the related credit support, if any;
- the type of mortgage loans underlying the securities;
- the circumstances under which the related underlying
mortgage loans, or the securities themselves, may be
purchased prior to maturity;
- the terms and conditions for substituting mortgage
loans backing the securities; and
- the characteristics of any agreements or instruments
providing interest rate protection to the securities.
With respect to any mortgage-backed security included as part
of the mortgage collateral for a series of offered bonds, we will provide in our
reports filed under the Securities Exchange Act of 1934, as amended, the same
information regarding the security as is provided by the issuer of the security
in its own reports filed under that Act, if the security was publicly offered,
or in the reports the issuer of the security provides to the related trustee, if
the security was privately issued.
SUBSTITUTION, ACQUISITION AND RELEASE OF MORTGAGE COLLATERAL
If so specified in the related prospectus supplement, we, the
related issuer or another specified person or entity may be permitted, at our or
its option, but subject to the conditions specified in that prospectus
supplement, to obtain a release of particular items of the related mortgage
collateral--
- in connection with a redemption of bonds, or
- in exchange for other mortgage loans or
mortgage-backed securities that--
1. conform to the description of mortgage
assets in this prospectus, and
2. satisfy the criteria set forth in the
related prospectus supplement.
In addition, if so specified in the related prospectus
supplement, the related bond trustee may be authorized or required, including at
the direction of the related issuer, to apply collections on the related
mortgage collateral to acquire new mortgage loans or mortgage-backed securities
that-
1. conform to the description of mortgage
assets in this prospectus, and
2. satisfy the criteria set forth in the
related prospectus supplement.
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No replacement of mortgage collateral or acquisition of new
mortgage collateral will be permitted if it would result in a qualification,
downgrade or withdrawal of the then-current rating assigned by any rating agency
to any class of affected offered bonds.
UNDELIVERED MORTGAGE ASSETS
In general, the total outstanding principal balance of the
mortgage collateral securing any particular series of bonds will equal or exceed
the initial total outstanding principal balance of those bonds. In the event
that the total outstanding principal balance of the related mortgage collateral
is less than the initial total outstanding principal balance of any series of
bonds, the related issuer may deposit or arrange for the deposit of cash or
liquid investments on an interim basis with the related bond trustee to cover
the shortfall. For 90 days following the date of initial issuance of that series
of bonds, the related issuer will be entitled to obtain a release of the
deposited cash or investments if it delivers or arranges for delivery of a
corresponding amount of mortgage collateral that satisfies the criteria
specified in the related prospectus supplement. If the related issuer fails,
however, to deliver mortgage collateral sufficient to make up the entire
shortfall, any of the cash or, following liquidation, investments remaining on
deposit with the related bond trustee will be used by that trustee to redeem
bonds of the related series, as described in the related prospectus supplement.
ACCOUNTS
The trust estate for a series of offered bonds will include
one or more accounts established and maintained on behalf of the holders. All
payments and collections received or advanced on the related mortgage collateral
and the other assets of the related trust estate will be deposited and held in
those accounts. We will identify and describe those accounts, and will further
describe the deposits to and withdrawals from those accounts, in the related
prospectus supplement.
CREDIT SUPPORT
GENERAL. The holders of any class of offered bonds may be the
beneficiaries of credit support designed to protect them partially or fully
against all or particular defaults and losses on the related mortgage
collateral. The types of credit support that may benefit the holders of a class
of offered bonds include:
- the subordination or one or more other classes of
bonds of the same series;
- a letter of credit;
- a surety bond;
- an insurance policy;
- a guarantee;
- a credit derivative; and/or
- a reserve fund.
In the related prospectus supplement, we will describe the
amount and types of any credit support benefiting the holders of a class of
offered bonds. If applicable, we will also identify the provider of that credit
support.
ARRANGEMENTS PROVIDING REINVESTMENT, INTEREST RATE AND CURRENCY RELATED
PROTECTION
The trust estate for a series of offered bonds may include
guaranteed investment contracts under which moneys held in the funds and
accounts established for that series will be invested at a specified rate.
The trust estate for a series of offered bonds may also include:
- interest rate exchange agreements;
- interest rate cap agreements;
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- interest rate floor agreements;
- currency exchange agreements; or
- other agreements or arrangements designed to reduce
the effects of interest rate or currency exchange
rate fluctuations with respect to the related
mortgage assets or one or more classes of those
offered bonds.
In the related prospectus supplement, we will describe any
agreements or other arrangements designed to protect the holders of a class of
offered bonds against shortfalls resulting from movements or fluctuations in
interest rates or currency exchange rates. If applicable, we will also identify
any obligor under the agreement or other arrangement.
YIELD AND MATURITY CONSIDERATIONS
GENERAL
The yield on your offered bonds will depend on--
- the price you paid for your offered bonds,
- the interest rate on your offered bonds,
- the amount and timing of payments on your offered
bonds.
The following discussion contemplates that the mortgage
collateral for a series of offered bonds consists only of mortgage loans. If the
related mortgage collateral also includes mortgage-backed securities, the
payment terms of those securities will soften or enhance the effects that the
characteristics and behavior of mortgage loans backing them can have on the
yield to maturity and/or weighted average life of a class of offered bonds. If
the mortgage collateral for a series of offered bonds includes mortgage-backed
securities, we will discuss in the related prospectus supplement the effect, if
any, that those mortgage-backed securities may have on the yield to maturity and
weighted average lives of those bonds.
INTEREST RATE
A class of interest-bearing offered bonds may have a fixed,
variable or adjustable interest rate. We will specify in the related prospectus
supplement the interest rate for each class of interest-bearing offered bonds
or, if the interest rate is variable or adjustable, the method of determining
that interest rate.
PAYMENT DELAYS
There will be a delay between the date on which payments on
the mortgage loans securing your offered bonds are due and the date on which
those payments are passed through to you and other investors. That delay will
reduce the yield that would otherwise be produced if those payments were passed
through on your offered bonds on the same date that they were due.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity on your offered bonds will be affected
by the rate of principal payments on the related mortgage loans and the
allocation of those principal payments to reduce the principal balance or
notional amount of your offered bonds. The rate of principal payments on those
mortgage loans will be affected by the following:
- the amortization schedules of the mortgage loans,
which may change from time to time to reflect, among
other things, changes in mortgage interest rates or
partial prepayments of principal;
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- the dates on which any balloon payments are due; and
- the rate of principal prepayments on the mortgage
loans, including voluntary prepayments by borrowers
and involuntary prepayments resulting from
liquidations, casualties or purchases of mortgage
loans.
Because the rate of principal prepayments on the mortgage
loans securing your offered bonds will depend on future events and a variety of
factors, we cannot give you any assurance as to that rate.
The extent to which the yield to maturity of your offered
bonds may vary from your anticipated yield will depend upon--
- whether you purchased your offered bonds at a
discount or premium and, if so, the extent of that
discount or premium, and
- when, and to what degree, payments of principal on
the mortgage loans securing your offered bonds are
applied or otherwise result in the reduction of the
principal balance or notional amount of your offered
bonds.
If you purchase your offered bonds at a discount, you should
consider the risk that a slower than anticipated rate of principal payments on
the related mortgage loans could result in an actual yield to you that is lower
than your anticipated yield. If you purchase your offered bonds at a premium,
you should consider the risk that a faster than anticipated rate of principal
payments on the related mortgage loans could result in an actual yield to you
that is lower than your anticipated yield.
If your offered bonds entitle you to payments of interest,
with disproportionate, nominal or no payments of principal, you should consider
that your yield will be extremely sensitive to prepayments on the related
mortgage loans and, under some prepayment scenarios, may be negative.
If a class of offered bonds accrues interest on a notional
amount, that notional amount will, in general, either--
- be based on the principal balances of some or all of
the mortgage assets included as part of the related
mortgage collateral, or
- equal the total principal balance of one or more of
the other classes of bonds of the same series.
Accordingly, the yield on that class of bonds will be inversely related to, as
applicable, the rate at which-
- payments and other collections of principal are
received on the mortgage assets referred to in the
first bullet point of the prior sentence, or
- payments are made in reduction of the total principal
balance of the class or classes of bonds referred to
in the second bullet point of the prior sentence.
The extent of prepayments of principal of the mortgage loans
securing your offered bonds may be affected by a number of factors, including:
- the availability of mortgage credit;
- the relative economic vitality of the area in which
the related real properties are located;
- the quality of management of the related real
properties;
- the servicing of the mortgage loans;
- possible changes in tax laws; and
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- other opportunities for investment.
In general, those factors that increase-
- the attractiveness of selling or refinancing a
commercial or multifamily property, or
- the likelihood of default under a commercial or
multifamily mortgage loan,
would be expected to cause the rate of prepayment to accelerate. In contrast,
those factors having an opposite effect would be expected to cause the rate of
prepayment to slow.
The rate of principal payments on the mortgage loans securing
your offered bonds may also be affected by the existence and enforceability of
prepayment restrictions, such as-
- prepayment lock-out periods, and
- requirements that voluntary principal prepayments be
accompanied by prepayment premiums, fees or charges.
If enforceable, those provisions could constitute either an
absolute prohibition, in the case of a prepayment lock-out period, or a
disincentive, in the case of a prepayment premium, fee or charge, to a
borrower's voluntarily prepaying its mortgage loan, thereby slowing the rate of
prepayments.
The rate of prepayment on a pool of mortgage loans is likely
to be affected by prevailing market interest rates for mortgage loans of a
comparable type, term and risk level. As prevailing market interest rates
decline, a borrower may have an increased incentive to refinance its mortgage
loan. Even in the case of adjustable rate mortgage loans, as prevailing market
interest rates decline, the related borrowers may have an increased incentive to
refinance for the following purposes:
- to convert to a fixed rate loan and thereby lock in
that rate, or
- to take advantage of a different index, margin or
rate cap or floor on another adjustable rate mortgage
loan.
Subject to prevailing market interest rates and economic
conditions generally, a borrower may sell a real property in order to--
- realize its equity in the property,
- meet cash flow needs or
- make other investments.
Additionally, some borrowers may be motivated by federal and state tax laws,
which are subject to change, to sell their properties prior to the exhaustion of
tax depreciation benefits. We make no representation as to--
- the particular factors that will affect the
prepayment of the mortgage loans securing any series
of offered bonds,
- the relative importance of those factors,
- the percentage of the principal balance of those
mortgage loans that will be paid as of any date, or
- the overall rate of prepayment on those mortgage
loans.
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WEIGHTED AVERAGE LIFE AND MATURITY
The rate at which principal payments are received on the
mortgage loans securing any series of offered bonds will affect the ultimate
maturity and the weighted average life of one or more classes of those bonds. In
general, weighted average life refers to the average amount of time that will
elapse from the date of issuance of an instrument until each dollar allocable as
principal of that instrument is repaid to the investor.
The weighted average life and maturity of a class of offered
bonds will be influenced by the rate at which principal on the related mortgage
loans is paid to that class, whether in the form of-
- scheduled amortization, or
- prepayments, including
1. voluntary prepayments by borrowers, and
2. involuntary prepayments resulting from
liquidations, casualties or condemnations
and purchases of mortgage loans out of the
related trust estate.
Prepayment rates on loans are commonly measured relative to a
prepayment standard or model, such as the CPR prepayment model or the SPA
prepayment model. CPR represents an assumed constant rate of prepayment each
month, expressed as an annual percentage, relative to the then outstanding
principal balance of a pool of mortgage loans for the life of those loans. SPA
represents an assumed variable rate of prepayment each month, expressed as an
annual percentage, relative to the then outstanding principal balance of a pool
of mortgage loans, with different prepayment assumptions often expressed as
percentages of SPA. For example, a prepayment assumption of 100% of SPA assumes
prepayment rates of 0.2% per annum of the then outstanding principal balance of
those loans in the first month of the life of the loans and an additional 0.2%
per annum in each month thereafter until the 30th month. Beginning in the 30th
month, and in each month thereafter during the life of the loans, 100% of SPA
assumes a constant prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or
assumption is a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any particular pool of mortgage loans.
Moreover, the CPR and SPA models were developed based upon historical prepayment
experience for single-family mortgage loans. It is unlikely that the prepayment
experience of the mortgage loans securing your offered bonds will conform to any
particular level of CPR or SPA.
In the prospectus supplement for a series of offered bonds, we
will include tables, if applicable, setting forth-
- the projected weighted average life of each class of
those offered bonds with principal balances, and
- the percentage of the initial total principal balance
of each of those classes that would be outstanding on
specified dates,
based on the assumptions stated in that prospectus supplement, including
assumptions regarding prepayments on the mortgage loans included as part of the
related mortgage collateral. Those tables and assumptions illustrate the
sensitivity of the weighted average lives of those bonds to various assumed
prepayment rates and are not intended to predict, or to provide information that
will enable you to predict, the actual weighted average lives of your offered
bonds.
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OTHER FACTORS AFFECTING YIELD, WEIGHTED AVERAGE LIFE AND MATURITY
BALLOON PAYMENTS; EXTENSIONS OF MATURITY. Some or all of the
mortgage loans securing a series of offered bonds may require that balloon
payments be made at maturity. The ability of a borrower to make a balloon
payment typically will depend upon its ability either
- to refinance the loan, or
- to sell the related real property.
If a borrower is unable to refinance or sell the related real
property, there is a possibility that the borrower may default on the mortgage
loan or that the maturity of the mortgage loan may be extended in connection
with a workout. If a borrower defaults, recovery of proceeds may be delayed by
- the bankruptcy of the borrower, or
- adverse economic conditions in the market where the
related real property is located.
In order to minimize losses on defaulted mortgage loans, the
related master servicer or special servicer may be authorized within prescribed
limits to modify mortgage loans that are in default or as to which a payment
default is reasonably foreseeable. Any defaulted balloon payment or modification
that extends the maturity of a mortgage loan may delay payments of principal on
your offered bonds and extend the weighted average life of your offered bonds.
NEGATIVE AMORTIZATION. The weighted average life of a class of
offered bonds can be affected by mortgage loans that permit negative
amortization to occur. Those are the mortgage loans that provide for the current
payment of interest calculated at a rate lower than the rate at which interest
accrues on the mortgage loan, with the unpaid portion of that interest being
added to the related principal balance. Negative amortization most commonly
occurs with respect to an adjustable rate mortgage loan that:
- limits the amount by which its scheduled payment may
adjust in response to a change in its mortgage
interest rate;
- provides that its scheduled payment will adjust less
frequently than its mortgage interest rate; or
- provides for constant scheduled payments regardless
of adjustments to its mortgage interest rate.
Negative amortization on one or more mortgage loans securing a
series of offered bonds may result in negative amortization on one or more
classes of those bonds. We will describe in the related prospectus supplement,
if applicable, the manner in which negative amortization with respect to the
mortgage loans securing a series of offered bonds is allocated among the
respective classes of those bonds.
The portion of any mortgage loan negative amortization
allocated to a class of offered bonds may result in a deferral of some or all of
the interest payable on those bonds. Deferred interest may be added to the total
principal balance of a class of offered bonds. In addition, an adjustable rate
mortgage loan that permits negative amortization would be expected during a
period of increasing interest rates to amortize, if at all, at a slower rate
than if interest rates were declining or were remaining constant. This slower
rate of mortgage loan amortization would be reflected in a slower rate of
amortization for one or more classes of bonds of the related series.
Accordingly, there may be an increase in the weighted average lives of those
classes of bonds to which any mortgage loan negative amortization would be
allocated or that would bear the effects of a slower rate of amortization of the
related mortgage loans.
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The extent to which the yield on your offered bonds may be
affected by any negative amortization on mortgage loans included as part of the
related mortgage collateral will depend, in part, upon whether you purchase your
offered bonds at a premium or a discount.
During a period of declining interest rates, the scheduled
payment on an adjustable rate mortgage loan may exceed the amount necessary to
amortize the loan fully over its remaining amortization schedule and pay
interest at the then applicable mortgage interest rate. The result is the
accelerated amortization of the mortgage loan. The acceleration in amortization
of a mortgage loan will shorten the weighted average lives of those classes of
offered bonds, if any, that entitle their holders to a portion of the principal
payments on the mortgage loan.
FORECLOSURES AND PAYMENT PLANS. The weighted average life of
and yield on your offered bonds will be affected by--
- the number of foreclosures with respect to the
mortgage loans securing those bonds; and
- the principal amount of the foreclosed mortgage loans
in relation to the principal amount of those mortgage
loans that are repaid in accordance with their terms.
Servicing decisions made with respect to the related mortgage
loans, including the use of payment plans prior to a demand for acceleration and
the restructuring of mortgage loans in bankruptcy proceedings or otherwise, may
also affect the payment patterns of particular mortgage loans and, as a result,
the weighted average life of and yield on your offered bonds.
LOSSES AND SHORTFALLS ON THE MORTGAGE COLLATERAL. The yield on
your offered bonds will directly depend on the extent to which you are required
to bear the effects of any losses or shortfalls in collections on the related
mortgage collateral and the timing of those losses and shortfalls. In general,
the earlier that you bear any loss or shortfall, the greater will be the
negative effect on the yield of your offered bonds.
The amount of any losses or shortfalls in collections on the
mortgage assets securing a series of offered bonds will, to the extent not
covered or offset by draws on any reserve fund or under any instrument of credit
support, be allocated among the various classes of bonds, including non-offered
bonds, of that series in the priority and manner, and subject to the
limitations, that we specify in the related prospectus supplement. As described
in the related prospectus supplement, those allocations may be effected by the
following:
- a reduction in the entitlements to interest and/or
the total principal balances of one or more classes
of bonds; and/or
- the establishment of a priority of payments among
classes of bonds.
If you purchase subordinated bonds, the yield to maturity on
those bonds may be extremely sensitive to losses and shortfalls in collections
on the related mortgage collateral.
ADDITIONAL BOND AMORTIZATION. If your offered bonds have a
principal balance, then they entitle you to a specified portion of the principal
payments received on the related mortgage collateral. They may also entitle you
to payments of principal from the following sources:
- amounts attributable to interest accrued but not
currently payable on one or more other classes of
bonds of the applicable series;
- interest received or advanced on the related mortgage
collateral that is in excess of the interest
currently accrued on the bonds of the applicable
series;
- prepayment premiums, fees and charges, payments from
equity participations or any other amounts received
on the related mortgage collateral that do not
constitute interest or principal; or
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- any other amounts described in the related prospectus
supplement.
The amortization of your offered bonds out of the sources
described in the prior paragraph would shorten their weighted average life and,
if your offered bonds were purchased at a premium, reduce their yield to
maturity.
STRUCTURED ASSET SECURITIES CORPORATION
We were incorporated in Delaware on January 2, 1987. We were
organized, among other things, for the purposes of--
- acquiring mortgage loans, or interests in those
loans, secured by first or junior liens on commercial
and multifamily real properties;
- acquiring mortgage-backed securities that evidence
interests in mortgage loans that are secured by
commercial and multifamily real properties;
- forming pools of mortgage loans and mortgage-backed
securities; and
- acting as depositor of trusts formed to issue bonds,
certificates of interest or other evidences of
indebtedness that are secured by or represent
interests in, pools of mortgage loans and
mortgage-backed securities.
Our principal executive offices are located at 200 Vesey Street, New York, New
York 10285. Our telephone number is 212-526-7000. There can be no assurance that
at any particular time we will have any significant assets.
ISSUERS
The issuer of each series of offered bonds will be an owner
trust established by us, under a deposit trust agreement between us, as
depositor, and a bank, trust company, corporation, association or other
fiduciary named in the related prospectus supplement, as owner trustee. We do
not expect any of those owner trusts to have any significant assets other than
those pledged to secure bonds. Concurrently with or prior to the initial
issuance of a series of offered bonds, we will convey to the related owner trust
the assets to be included in the trust estate for those bonds in exchange for--
- certificates of beneficial interest in the related
owner trust,
- bonds, and/or
- net proceeds from the sale of bonds.
We may in turn sell or assign those certificates of beneficial interest and/or
bonds so received to one or more persons or entities, including our affiliates.
The related deposit trust agreement and/or the related
indenture will provide that an issuer of offered bonds may not conduct any
activities other than those related to the issuance and sale of one or more
series of bonds. The holders of the beneficial interests in an owner trust that
issues a series of offered bonds will not be liable for the payment of those
bonds. Furthermore, the holders of those bonds will be deemed to have released
the beneficial owners of that owner trust from that liability.
If so specified in the related prospectus supplement, and
subject to the satisfaction of all applicable conditions precedent, an issuer of
offered bonds may be permitted to--
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- transfer the mortgage collateral and other assets
pledged to secure those bonds to another trust or
other limited purpose entity that assumes all of its
obligations with respect to those bonds, thereby
relieving the transferor of those obligations, and
- issue additional series of bonds.
DESCRIPTION OF THE BONDS
GENERAL
In general, each series of offered bonds will be secured,
nonrecourse obligations of the related issuer. As part of the same series, an
issuer may also issue bonds that will not be offered by this prospectus. Each
series of offered bonds will consist of one or more classes. Any non-offered
bonds of that series will likewise consist of one or more classes.
A series of bonds consists of all those bonds that--
- have the same series designation;
- were issued under the same indenture; and
- are secured by the same mortgage collateral.
A class of bonds consists of all those bonds of a particular
series that--
- have the same class designation; and
- have the same payment terms.
The respective classes of offered and non-offered bonds of any
series may have a variety of payment terms. An offered bond may entitle the
holder to receive:
- a stated principal amount, which will be represented
by its principal balance;
- interest on a principal balance or notional amount,
at a fixed, variable or adjustable interest rate;
- specified, fixed or variable portions of the
interest, principal or other amounts received on the
related mortgage collateral;
- payments of principal, with disproportionate, nominal
or no payments of interest;
- payments of interest, with disproportionate, nominal
or no payments of principal;
- payments of interest or principal that commence only
as of a specified date or only after the occurrence
of specified events, such as the payment in full of
the interest and principal outstanding on one or more
other classes of bonds of the same series;
- payments of principal to be made, from time to time
or for designated periods, at a rate that is-
1. faster and, in some cases, substantially
faster, or
2. slower and, in some cases, substantially
slower,
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than the rate at which payments or other collections
of principal are received on the related mortgage
collateral;
- payments of principal to be made, subject to
available funds, based on a specified principal
payment schedule or other methodology;
- payments of all or part of the prepayment or
repayment premiums, fees and charges, equity
participations payments or other similar items
received on the related mortgage collateral; or
- any other payments described in the related
prospectus supplement and payable out of the assets
of the related trust estate.
Any class of offered bonds may be senior or subordinate to one
or more other classes of bonds of the same series, including a non-offered class
of bonds of that series, for purposes of some or all payments and/or allocations
of losses or other shortfalls.
A class of offered bonds may have two or more component parts,
each having characteristics that are described in this prospectus as being
attributable to separate and distinct classes. For example, a class of offered
bonds may have a total principal balance on which it accrues interest at a
fixed, variable or adjustable rate. That class of offered bonds may also accrue
interest on a total notional amount at a different fixed, variable or adjustable
rate. In addition, a class of offered bonds may accrue interest on one portion
of its total principal balance or notional amount at one fixed, variable or
adjustable rate and on another portion of its total principal balance or
notional amount at a different fixed, variable or adjustable rate.
Each class of offered bonds will be issued in minimum
denominations corresponding to specified principal balances, notional amounts or
percentage interests, as described in the related prospectus supplement. A class
of offered bonds may be issued--
- in fully registered, definitive form and evidenced by
physical securities, or
- in book-entry form through the facilities of The
Depository Trust Company.
Offered bonds held in fully registered, definitive form may be transferred or
exchanged, subject to any restrictions on transfer described in the related
prospectus supplement, at the location specified in the related prospectus
supplement, without the payment of any service charges, except for any tax or
other governmental charge payable in connection with the transfer or exchange.
Interests in offered bonds held in book-entry form will be transferred on the
book-entry records of DTC and its participating organizations. If we so specify
in the related prospectus supplement, we will arrange for clearance and
settlement through Clearstream Banking, societe anonyme or the Euroclear System,
for so long as they are participants in DTC.
PAYMENTS ON THE BONDS
GENERAL. Payments on a series of offered bonds may occur
monthly, bi-monthly, quarterly, semi-annually, annually or at any other
specified interval. In the prospectus supplement for each series of offered
bonds, we will identify:
- the periodic payment date for that series, and
- the record date as of which bondholders entitled to
payments on any particular payment date will be
established.
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All payments with respect to a class of offered bonds on any
payment date will be allocated PRO RATA among the outstanding bonds of that
class in proportion to the respective principal balances, notional amounts or
percentage interests, as the case may be, of those bonds. Payments on an offered
bond will be made to the holder entitled to those payments either--
- by wire transfer of immediately available funds to
the account of that holder at a bank or similar
entity, provided that the holder has furnished the
party making the payments with wiring instructions no
later than the applicable record date and has
satisfied any other conditions specified in the
related prospectus supplement, or
- by check mailed to the address of that holder as it
appears in the bond register, in all other cases.
In general, the final payment on any offered bond will be made
only upon presentation and surrender of that bond at the location specified to
the holder in notice of final payment.
PAYMENTS OF INTEREST. In the case of each class of
interest-bearing offered bond, interest will accrue from time to time, at the
applicable interest rate and in accordance with the applicable interest accrual
method, on the total outstanding principal balance or notional amount of that
class.
The interest rate for a class of interest-bearing offered
bonds may be fixed, variable or adjustable. We will specify in the related
prospectus supplement the interest rate for each class of interest-bearing
offered bonds or, in the case of a variable or adjustable interest rate, the
method for determining that interest rate.
Interest may accrue with respect to any offered bond on the
basis of:
- a 360-day year consisting of 12 30-day months,
- the actual number of days elapsed during each
relevant period in a year assumed to consist of 360
days,
- the actual number of days elapsed during each
relevant period in a normal calendar year, or
- any other method identified in the related prospectus
supplement.
We will identify the interest accrual method for each class of
offered bonds in the related prospectus supplement.
Subject to available funds and any adjustments to interest
entitlements described in the related prospectus supplement, accrued interest
with respect to each class of interest-bearing offered bonds will normally be
payable on each payment date. However, in the case of some classes of
interest-bearing offered bonds, payments of accrued interest will only begin on
a particular payment date or under the circumstances described in the related
prospectus supplement. Prior to that time, the amount of accrued interest
otherwise payable on that class will be added to its total principal balance on
each date or otherwise deferred as described in the related prospectus
supplement.
If a class of offered bonds accrues interest on a total
notional amount, that total notional amount, in general, will be either:
- based on the principal balances of some or all of the
mortgage assets included as part of the related
mortgage collateral; or
- equal to the total principal balances of one or more
other classes of bonds of the same series.
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Reference to the notional amount of any bond is solely for convenience in making
some calculations of interest and does not represent the right to receive any
payments of principal.
We will describe in the related prospectus supplement the
extent to which the amount of accrued interest that is payable on, or that may
be added to the total principal balance of, a class of interest-bearing offered
bonds may be reduced as a result of any contingencies, including shortfalls in
interest collections due to prepayments, delinquencies, losses and deferred
interest on the related mortgage assets.
PAYMENTS OF PRINCIPAL. An offered bond may or may not have a
balance. If it does, that principal balance outstanding from time to time will
represent the maximum amount that the holder of that bond will be entitled to
receive as principal out of the future cash flow on the related mortgage
collateral and the other assets of the related trust estate. The total
outstanding principal balance of any class of offered bonds will be reduced by--
- payments of principal actually made to the holders of
that class, and
- if and to the extent that we so specify in the
related prospectus supplement, losses of principal on
the related mortgage collateral that are allocated to
or are required to be borne by that class.
A class of interest - bearing offered bonds may provide that payments of accrued
interest will only begin on a particular payment date or under the circumstances
described in the related prospectus supplement. If so, the total outstanding
principal balance of that class may be increased by the amount of any interest
accrued, but not currently payable, on that class.
We will describe in the related prospectus supplement any
other adjustments to the total outstanding principal balance of a class of
offered bonds.
Unless we so state in the related prospectus supplement, the
initial total principal balance of all classes of a series of bonds will not be
greater than the total outstanding principal balance of the related mortgage
collateral. We will specify the expected initial total principal balance of each
class of offered bonds in the related prospectus supplement.
The payments of principal to be made on a series of offered
bonds from time to time will, in general, be a function of the payments, other
collections and advances received or made with respect to the related prospectus
supplement. Payments of principal on a series of offered bonds may also be made
from the following sources:
- amounts attributable to interest accrued but not
currently payable on one or more other classes of
bonds of the applicable series;
- interest received or advanced on the related mortgage
collateral that is in excess of the interest
currently accrued on the bonds of the applicable
series;
- prepayment premiums, fees and charges, payments from
equity participations or any other amounts received
on the related mortgage collateral that do not
constitute interest or principal; or
- any other amounts described in the related prospectus
supplement.
We will describe in the related prospectus supplement the
principal entitlement of each class of offered bonds on each payment date.
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ALLOCATION OF LOSSES AND SHORTFALLS
If and to the extent that any losses or shortfalls in
collections on the mortgage assets securing a series of offered bonds are not
covered or offset by delinquency advances or draws on any reserve fund or under
any instrument of credit support, they will be allocated among the various
classes of bonds, including non-offered bonds, of that series in the priority
and manner, and subject to the limitations, specified in the related prospectus
supplement. As described in the related prospectus supplement, the allocations
may be effected by one or both of the following methods:
- by reducing the entitlements to interest and/or the
total principal balances of one or more of those
classes; and
- by establishing a priority of payments among those
classes.
See "Description of Credit Support."
ADVANCES
If any series of offered bonds are secured by mortgage loans,
then as and to the extent described in the related prospectus supplement, then,
as and to the extent described in the related prospectus supplement, the related
master servicer, the related special servicer, the related bond trustee, any
related provider of credit support and/or any other specified person may be
obligated to make, or may have the option of making, specified advances with
respect to those mortgage loans to cover--
- delinquent payments of principal and/or interest,
other than balloon payments,
- property protection expenses,
- other servicing expenses, or
- any other items specified in the related prospectus
supplement.
If there are any limitations with respect to a party's advancing obligations, we
will discuss those limitations in the related prospectus supplement.
Advances are intended to maintain a regular flow of scheduled
interest and principal payments to bondholders. Advances are not a guarantee
against losses. The advancing party will be entitled to recover all of its
advances out of-
- subsequent recoveries on the related mortgage loans,
including amounts drawn under any fund or instrument
constituting credit support, and
- any other specific sources identified in the related
prospectus supplement.
If and to the extent that we so specify in the related
prospectus supplement, any entity making advances will be entitled to receive
interest on some or all of those advances for a specified period during which
they are outstanding at the rate-
- specified in that prospectus supplement. That entity
may be entitled to payment of interest on its
outstanding advances periodically from general
collections on the related mortgage collateral, prior
to any payment to the related series of bondholders,
or
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- at any other times and from any sources we may
describe in the related prospectus supplement.
If any series of offered bonds are secured by mortgage-backed
securities, we will discuss in the related prospectus supplement any comparable
advancing obligations with respect to those securities or the mortgage loans
that back them.
REPORTS TO BONDHOLDERS
On or about each payment date, the related master servicer,
manager or bond trustee will forward to each holder of an offered bond a
statement substantially in the form, or specifying the information, set forth in
the related prospectus supplement. In general, that statement will include
information regarding-
- the payments made on that payment date with respect
to the applicable class of offered bonds, and
- the recent performance of the related mortgage
collateral.
Within a reasonable period of time after the end of each
calendar year, the related master servicer, manager or bond trustee, as the case
may be, will be required to furnish to each person who at any time during the
calendar year was a holder of an offered bond a statement containing information
regarding the principal, interest and other amounts paid on the applicable class
of offered bonds, aggregated for-
- that calendar year, or
- the applicable portion of that calendar year during
which the person was a bondholder.
The obligation to provide that annual statement will be deemed to have been
satisfied by the related master servicer, manager or trustee, as the case may
be, to the extent that substantially comparable information is provided in
accordance with any requirements of the Internal Revenue Code of 1986.
If the related mortgage collateral includes mortgage-backed
securities, the ability of the related master servicer, manager or bond trustee,
as the case may be, to include in any payment date statement information
regarding the mortgage loans that back those securities will depend on
comparable reports being received with respect to them.
VOTING RIGHTS
Voting rights will be allocated among the respective classes
of offered and non-offered bonds of each series in the manner described in the
related prospectus supplement. Bondholders will generally not have a right to
vote, except-
- with respect to those amendments to the governing
documents described under "Description of the
Governing Documents--Amendment," or
- as otherwise specified this prospectus or in the
related prospectus supplement.
As and to the extent described in the related prospectus
supplement, the bondholders entitled to a specified amount of voting rights for
a particular series will have the right to act as a group to remove or replace
the
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related bond trustee, master servicer, special servicer or manager. In general,
that removal or replacement must be for cause. We will identify exceptions in
the related prospectus supplement.
REDEMPTION
If we so specify in the related prospectus supplement, any
series of offered bonds may be redeemable in whole or in part, as follows:
- by special redemption, if the bond trustee determines
that the amount available to make payments on the
bonds on the next regular payment date is
insufficient,
- by optional redemption, at the option of the related
issuer, or
- by mandatory redemption, at the request of specified
bondholders.
Written notice of any redemption will be given to each
affected bondholder. Payment of the redemption price will be made only upon
presentation and surrender of the bonds of the related series at the location to
be specified in the notice of redemption.
We will describe in the related prospectus supplement the
conditions and procedures under which any redemption may occur.
BOOK-ENTRY REGISTRATION
GENERAL. Any class of offered bonds may be issued in
book-entry form through the facilities of DTC. If so, that class will be
represented by one or more global securities registered in the name of DTC or
its nominee. If we so specify in the related prospectus supplement, we will
arrange for clearance and settlement through the Euroclear System or Clearstream
Banking, societe anonyme for so long they are participants in DTC.
DTC, EUROCLEAR AND CLEARSTREAM. DTC is:
- a limited-purpose trust company organized under the
New York Banking Law,
- a "banking corporation" within the meaning of the New
York Banking Law,
- a member of the Federal Reserve System,
- a "clearing corporation" within the meaning of the
New York Uniform Commercial Code, and
- a "clearing agency" registered under the provisions
of Section 17A of the Securities Exchange Act of
1934, as amended.
DTC was created to hold securities for participants in the DTC
system and to facilitate the clearance and settlement of securities transactions
between those participants through electronic computerized book-entry changes in
their accounts, thereby eliminating the need for physical movement of securities
certificates. Organizations that maintain accounts with DTC include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include other organizations. DTC is owned by a number of its participating
organizations and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as banks, brokers, dealers
and trust companies that directly or indirectly clear through or maintain a
custodial relationship with one of the organizations that maintains an account
with DTC. The rules applicable to DTC and its participating organizations are on
file with the SEC.
It is our understanding that Clearstream was incorporated in
1970 as "Cedel S.A.," a company with limited liability under the laws of
Luxembourg. Cedel S.A. subsequently changed its name to Cedelbank. On
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January 10, 2000, Cedelbank's parent company, Cedel International, societe
anonyme merged its clearing, settlement and custody business with that of
Deutsche Borse Clearing AG. The merger involved the transfer by Cedel
International of substantially all of its assets and liabilities, including its
shares in Cedelbank, to a new Luxembourg company, New Cedel International,
societe anonyme. New Cedel International is 50% owned by Cedel International and
50% by Deutsche Borse AG, the parent of Deutsche Borse Clearing AG. The
shareholders of these two entities are recognized financial institutions around
the world, including underwriters, securities brokers and dealers, banks, trust
companies and clearing corporations. On January 18, 2000, Cedelbank was renamed
Clearstream Banking, societe anonyme. Clearstream holds securities for its
member organizations and facilitates the clearance and settlement of securities
transactions between its member organizations through electronic book-entry
changes in accounts of those organizations, thereby eliminating the need for
physical movement of bonds. Transactions may be settled in Clearstream in any of
36 currencies, including United States dollars. Clearstream provides to its
member organizations, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream interfaces with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream is registered as a bank in Luxembourg, and
as such is subject to regulation by the Commission de Surveillance du Secteur
Financier, which supervises Luxembourg banks. Clearstream's customers are
world-wide financial institutions including underwriters, securities brokers and
dealers, banks, trust companies and clearing corporations. Clearstream's U.S.
customers are limited to securities brokers and dealers, and banks. Currently,
Clearstream has approximately 2,000 customers located in over 80 countries,
including all major European countries, Canada and the United States. Indirect
access to Clearstream is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream.
Clearstream and Euroclear have established an electronic bridge between their
two systems across which their respective participants may settle trades with
each other.
It is our understanding that Euroclear was founded in December
1968 to hold securities for its member organizations and to clear and settle
transactions between its member organizations through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of bonds and any risk from lack of simultaneous transfers of securities
and cash. Over 100,000 different securities are accepted for settlement through
Euroclear, the majority of which are domestic securities from over 30 markets.
Transactions may be settled in Euroclear in any of over 35 currencies, including
United States dollars. The Euroclear system includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described below in this "--Book-Entry Registration" section.
Euroclear is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office, under contract with Euroclear Clearance System, S.C., a Belgian
cooperative corporation. All operations are conducted by the Euroclear Operator,
and all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not ECS. ECS establishes policy for the
Euroclear system on behalf of the more than 120 member organizations of
Euroclear. Those member organizations 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 member organization of
Euroclear, either directly or indirectly. Euroclear and Clearstream have
established an electronic bridge between their two systems across which their
respective participants may settle trades with each other.
The Euroclear Operator is the Belgian branch of a New York
banking corporation which is a member bank of the Federal Reserve System. It is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the
Euroclear Operator are governed by the Euroclear Terms and Conditions. The
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Euroclear Terms and Conditions govern transfers of securities and cash within
the Euroclear system, withdrawal of securities and cash from the Euroclear
system, and receipts of payments with respect to securities in the Euroclear
system. All securities in the Euroclear system are held on a fungible basis
without attribution of specific securities to specific securities clearance
accounts. The Euroclear Operator acts under the Euroclear Terms and Conditions
only on behalf of member organizations of Euroclear and has no record of or
relationship with persons holding through those member organizations.
The information in this prospectus concerning DTC, Euroclear
and Clearstream, and their book-entry systems, has been obtained from sources
believed to be reliable, but we do not take any responsibility for the accuracy
or completeness of that information.
HOLDING AND TRANSFERRING BOOK-ENTRY BONDS. Purchases of
book-entry bonds under the DTC system must be made by or through, and will be
recorded on the records of, the Financial Intermediary that maintains the
beneficial owner's account for that purpose. In turn, the Financial
Intermediary's ownership of those bonds will be recorded on the records of DTC
or, alternatively, if the Financial Intermediary does not maintain an account
with DTC, on the records of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the records
of DTC. A beneficial owner of book-entry bonds must rely on the foregoing
procedures to evidence its beneficial ownership of those bonds. DTC has no
knowledge of the actual beneficial owners of the book-entry bonds. DTC's records
reflect only the identity of the direct participants to whose accounts those
bonds are credited, which may or may not be the actual beneficial owners. The
participants in the DTC system will remain responsible for keeping account of
their holdings on behalf of their customers.
Transfers between participants in the DTC system will be
effected in the ordinary manner in accordance with DTC's rules and will be
settled in same-day funds. Transfers between direct account holders at Euroclear
and Clearstream, or between persons or entities participating indirectly in
Euroclear or Clearstream, will be effected in the ordinary manner in accordance
with their respective procedures and in accordance with DTC's rules.
Cross-market transfers between direct participants in DTC, on
the one hand, and member organizations at Euroclear or Clearstream, on the
other, will be effected through DTC in accordance with DTC's rules and the rules
of Euroclear or Clearstream, as applicable. These cross-market transactions will
require, among other things, delivery of instructions by the applicable member
organization to Euroclear or Clearstream, as the case may be, in accordance with
the rules and procedures and within deadlines, Brussels time, established in
Euroclear or Clearstream, as the case may be. If the transaction complies with
all relevant requirements, Euroclear or Clearstream, as the case may be, will
then deliver instructions to its depositary to take action to effect final
settlement on its behalf.
Because of time-zone differences, the securities account of a
member organization of Euroclear or Clearstream purchasing an interest in a
global security from a DTC participant that is not such a member organization,
will be credited during the securities settlement processing day, which must be
a business day for Euroclear or Clearstream, as the case may be, immediately
following the DTC settlement date. Transactions in interests in a book-entry
security settled during any securities settlement processing day will be
reported to the relevant member organization of Euroclear or Clearstream on the
same day. Cash received in Euroclear or Clearstream as a result of sales of
interests in a book-entry security by or through a member organization of
Euroclear or Clearstream, as the case may be, to a DTC participant that is not
such a member organization will be received with value on the DTC settlement
date, but will not be available in the relevant Euroclear or Clearstream cash
account until the business day following settlement in DTC. The related
prospectus supplement will contain additional information regarding clearance
and settlement procedures for the book-entry bonds and with respect to tax
documentation procedures relating to the book-entry bonds.
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Conveyance of notices and other communications by DTC to DTC
participants, and by DTC participants to Financial Intermediaries and beneficial
owners, will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Payments on the book-entry bonds will be made to DTC. DTC's
practice is to credit DTC participants' accounts on the related payment date in
accordance with their respective holdings shown on DTC's records, unless DTC has
reason to believe that it will not receive payment on that date. Disbursement of
those payments by DTC participants to Financial Intermediaries and beneficial
owners will be--
- governed by standing instructions and customary
practices, as is the case with securities held for
the accounts of customers in bearer form or
registered in "street name," and
- the sole responsibility of each of those DTC
participants, subject to any statutory or regulatory
requirements in effect from time to time.
Under a book-entry system, beneficial owners may receive payments after the
related payment date.
The only "bondholder" of book-entry bonds will be DTC or its
nominee. Parties to the governing documents for any series of offered bonds need
not recognize beneficial owners of book-entry bonds as "bondholders." The
beneficial owners of book-entry bonds will be permitted to exercise the rights
of "bondholders" only indirectly through the DTC participants, who in turn will
exercise their rights through DTC. We have been informed that DTC will take
action permitted to be taken by a "bondholder" only at the direction of one or
more DTC participants. DTC may take conflicting actions with respect to the
book-entry bonds to the extent that those actions are taken on behalf of
Financial Intermediaries whose holdings include those bonds.
Because DTC can act only on behalf of DTC participants, who in
turn act on behalf of Financial Intermediaries and beneficial owners of the
applicable book-entry securities, the ability of a beneficial owner to pledge
its interest in a class of book-entry bonds to persons or entities that do not
participate in the DTC system, or otherwise to take actions with respect to its
interest in a class of book-entry bonds, may be limited due to the lack of a
physical security evidencing that interest.
ISSUANCE OF DEFINITIVE BONDS. Unless we specify otherwise in
the related prospectus supplement, beneficial owners of affected offered bonds
initially issued in book-entry form will not be able to obtain physical
securities that represent those offered bonds, unless:
- we advise the related bond trustee in writing that
DTC is no longer willing or able to discharge
properly its responsibilities as depository with
respect to those offered bonds and we are unable to
locate a qualified successor; or
- we elect, at our option, to terminate the book-entry
system through DTC with respect to those offered
bonds.
Upon the occurrence of either of the two events described in
the prior paragraph, DTC will be required to notify all DTC participants of the
availability through DTC of physical bonds with respect to the affected offered
bonds. Upon surrender by DTC of the global security or securities representing a
class of book-entry offered bonds, together with instructions for registration,
the related bond trustee or other designated party will be required to issue to
the beneficial owners identified in those instructions physical securities
representing those offered bonds.
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DESCRIPTION OF THE GOVERNING DOCUMENTS
GENERAL
The "Governing Documents" for purposes of issuing the bonds of
each series will be the deposit trust agreement, the indenture and any servicing
and administration agreement(s).
Any party to the Governing Documents for a series of offered
bonds, or any of its affiliates, may own bonds, including non-offered bonds, of
that series. However, except in limited circumstances, including with respect to
consents to amendments to the related Governing Documents, bonds that are held
by parties to those Governing Documents will not be allocated voting rights.
A form of a deposit trust agreement, trust indenture and
servicing and administration agreement have been filed as exhibits to the
registration statement of which this prospectus is a part. However, the
provisions of the Governing Documents for each series of offered bonds will vary
based upon the nature of those bonds and the nature of the related trust estate.
The following summaries describe select provisions that may appear in the
Governing Documents for each series of offered bonds. The prospectus supplement
for each series of offered bonds will provide material additional information
regarding the Governing Documents for that series. The summaries in this
prospectus do not purport to be complete. You should refer to the provisions of
the Governing Documents for your offered bonds and, further, to the description
of those provisions in the related prospectus supplement. We will provide you
with a copy of the Governing Documents, exclusive of exhibits, that relate to
your offered bonds, without charge, upon written request addressed to our
principal executive offices specified under "Structured Asset Securities
Corporation."
THE DEPOSIT TRUST AGREEMENT
GENERAL. The issuer of each series of offered bonds will be an
owner trust. We will establish that owner trust in accordance with a deposit
trust agreement between us, as depositor, and a bank, trust company,
corporation, association or other fiduciary named in the related prospectus
supplement, as owner trustee. The related deposit trust agreement will limit the
activities of each issuer of offered bonds to those incidental to the issuance
of one or more series of bonds.
CONVEYANCE OF THE TRUST ESTATE. Under the terms of the related
deposit trust agreement, we will convey to the issuer of a series of offered
bonds the related mortgage collateral and the other assets of the related trust
estate. We will specify in the related prospectus supplement all material
documents to be delivered, and all other material actions to be taken, by us or
any prior holder of the related mortgage collateral in connection with that
conveyance. We will also specify in the related prospectus supplement any
remedies available to the related bondholders, or the related bond trustee on
their behalf, in the event that any of those material documents are not
delivered or any of those other material actions are not taken as required.
In exchange for our conveyance of the related mortgage
collateral and the other assets of the related trust estate to the owner trust
that will issue a series of offered bonds, we will receive certificates of
beneficial interest in that owner trust, bonds of that series and/or net
proceeds from the sale of bonds of that series.
REPRESENTATIONS AND WARRANTIES WITH RESPECT TO MORTGAGE
ASSETS. Unless we state otherwise in the prospectus supplement for any series of
offered bonds, we will, with respect to each mortgage asset pledged to secure
that series, make or assign, or cause to be made or assigned, a limited set of
representations and warranties covering, by way of example:
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- the accuracy of the information set forth for each
mortgage asset on the schedule of mortgage assets
appearing as an exhibit to the related deposit trust
agreement;
- the warranting party's title to each mortgage asset
and the authority of the warranting party to transfer
that mortgage asset; and
- in the case of a mortgage loan--
1. the enforceability of the related mortgage
note and mortgage,
2. the existence of title insurance insuring
the lien priority of the related mortgage,
and
3. the payment status of the mortgage loan.
We will identify the warranting party, and give a more
complete sampling of the representations and warranties to be made by it, in the
related prospectus supplement. We will also specify in the related prospectus
supplement any remedies available to the related bondholders, or the related
bond trustee on their behalf, in the event of a breach of any of those
representations and warranties. In most cases, the warranting party will be us
or another prior holder of the related mortgage collateral.
THE INDENTURE
GENERAL. The issuer of each series of offered bonds will--
- issue those bonds and any non-offered bonds of the
same series, and
- pledge, among other things, the related mortgage
collateral to secure its obligations, in particular
its payment obligations, with respect to those bonds
and any non-offered bonds of the same series,
under an indenture between the related owner trustee, on behalf of the issuer,
and a bank, trust company, corporation, association or other fiduciary named in
the related prospectus supplement, as bond trustee on behalf of the bondholders.
The indenture for each series of offered bonds will set forth,
among other things--
- the terms and conditions of those bonds and any
non-offered bonds of the same series,
- the obligations of the related issuer with respect to
those bonds and any non-offered bonds of the same
series, and
- the obligations of the related issuer and the related
bond trustee with respect to the related trust
estate.
PLEDGE OF MORTGAGE ASSETS. At the time of initial issuance of
any series of offered bonds, the related issuer will pledge to the related bond
trustee, among other things, the related mortgage collateral and and any other
related rights and assets secure the obligations, in particular the payment
obligations, of that issuer with respect to those bonds and any non-offered
bonds. We will specify in the related prospectus supplement all material
documents with respect to the related mortgage assets that will be delivered
to the related bond trustee, and all other actions to be taken by us or any
prior holder of the related mortgage assets, in connection with that pledge.
Concurrently with that pledge of assets, the related trustee will deliver to
the related issuer or its designee, which may include us, the bonds of the
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applicable series in exchange for those assets. The related bond trustee will
hold the trust estate for each series of offered bonds as security for those
bonds and any non-offered bonds of the same series, and the respective classes
of bondholders of that series will be entitled to the equal and proportionate
benefits of that security, subject to the express subordination of specified
classes of those bondholders.
Each mortgage asset securing a series of offered bonds will be
identified in a schedule appearing as an exhibit to the related indenture. That
schedule generally will include detailed information about each of those
mortgage assets, including:
- in the case of a mortgage loan, the address of the
related real property and the type of that property,
the mortgage interest rate and, if applicable, the
applicable index, gross margin, adjustment date and
any rate cap information, the remaining term to
maturity, the remaining amortization term, and the
outstanding principal balance; and
- in the case of a mortgage-backed security, the
outstanding principal balance and the pass-through
rate or coupon rate.
COVENANTS OF THE ISSUER. For so long as the offered bonds of
any series are outstanding, the related issuer may not liquidate or dissolve,
without the consent of the holders of bonds, including non-offered bonds, of
that series entitled to not less than 66-2/3%, or any other percentage specified
in the related prospectus supplement, of the related voting rights. In addition,
for so long as the offered bonds of any series are outstanding, the related
issuer also may not consolidate or merge with or into any other person or entity
or, except as described in this prospectus, convey or transfer its properties
and assets substantially as an entirety:
- without the consent of the holders of bonds,
including non-offered bonds, of that series entitled
to not less than 66-2/3%, or any other percentage
specified in the related prospectus supplement, of
the related voting rights, and
- unless, among other things--
1. the person or entity, if other than the
issuer, formed or surviving that merger or
consolidation or acquiring those assets is
organized under the laws of the United
States of America or any State thereof and
has expressly assumed, by supplemental
indenture, the due and punctual payment of
principal of and interest on all bonds of
that series and the performance of every
applicable covenant of the related indenture
to be performed by the related issuer,
2. immediately after giving effect to that
transaction, no issuer event of default will
have occurred and be continuing,
3. the related bond trustee will have received
written confirmation from each rating agency
with respect to that series to the effect
that the consummation of that transaction
will not cause that rating agency to
downgrade or withdraw its then-current
rating of any class of bonds of that series,
and
4. the related bond trustee will have received
from the related issuer an officers'
certificate and an opinion of counsel, each
to the effect that, among other things, that
transaction complies with the foregoing
requirements.
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With limited exception, no issuer of offered bonds may incur, assume,
have outstanding or guarantee any indebtedness other than secured, nonrecourse
bonds under an indenture and other than obligations incidental to the issuance
of those bonds.
MODIFICATION OF INDENTURE. The issuer and bond trustee for any series
of offered bonds may amend the related indenture or enter into supplemental
indentures, without obtaining the consent of the holders of any bonds, including
non-offered bonds, of that series--
- to evidence the succession of another person to the related
issuer for that series,
- to add to the conditions, limitations and restrictions on
selected terms of that series and to the covenants of the
related issuer or bond trustee,
- to surrender any right or power conferred upon the related
issuer,
- to convey, transfer, assign, mortgage or pledge any property
to the related bond trustee,
- to correct or amplify the description of any property subject
to the lien of the related indenture,
- to modify the related indenture to the extent necessary to
effect the related bond trustee's qualifications under the
Trust Indenture Act or comply with the requirements of the
Trust Indenture Act,
- to make any amendment necessary or desirable to maintain the
status of any portion of the related trust estate as a REMIC,
to avoid classification as a TMP or to avoid some taxes that
may be imposed on REMICs, or
- to evidence and provide for the acceptance of appointment by a
successor bond trustee, or
- for any other reason specified in the related prospectus
supplement.
The issuer and bond trustee for any series of offered bonds may also
amend the related indenture or enter into supplemental indentures, without
obtaining the consent of the holders of any bonds, including non-offered bonds,
of that series--
- to cure an ambiguity,
- to correct or supplement any provision of that indenture or
any supplemental indenture which may be defective or
inconsistent with any other provisions,
- to make or amend other provisions with respect to matters or
questions arising under the related indenture or any
supplemental indenture, or
- for any other purpose specified in the related prospectus
supplement,
provided that that action will not materially adversely affect the interests of
the holders of the offered and non-offered bonds of that series.
In general, with the consent of the holders of offered bonds and
non-offered bonds representing greater than 50%, or any other percentage
specified in the related prospectus supplement, of the voting
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rights for the applicable series, the related bond trustee and issuer may amend
the related indenture or execute a supplemental indenture--
- to add provisions to, or change or eliminate any provisions
of, the related indenture, or
- to modify the rights of the holders of the bonds of the
applicable series.
However, unless otherwise specified in the related prospectus
supplement, no amendment or supplemental indenture contemplated by the preceding
paragraph may, without the consent of the holder of each outstanding bond
affected:
- change the date of payment of any installment of principal of
or interest on any bond, or reduce the principal amount of,
the interest rate for or the redemption price with respect to
any bond, or change the provisions of the related indenture
relating to the application of collections on or with respect
to the related trust estate to payment of principal of or
interest on any bond, or change any place of payment where, or
the coin or currency in which, any principal or interest on
any bond is payable, or impair the right to institute suit for
the enforcement of the provisions of the related indenture
regarding payment;
- reduce the percentage of voting rights represented by the
bonds of the applicable series, or any class of that series,
the consent of the holders of which is required for the
authorization of an amendment or supplemental indenture
or for any waiver of compliance with selected provisions of
the related indenture or specified defaults under the related
indenture and their consequences;
- modify or alter the provisions of the related indenture
defining the term "Outstanding";
- permit the creation of any lien ranking prior to or on a
parity with the lien of the related indenture with respect to
any part of the property subject to the lien of that indenture
or terminate the lien of that indenture on any property at any
time subject to that indenture or deprive the holder of any
bond of the security afforded by the lien of that indenture;
- reduce the percentage of voting rights represented by the
bonds of the applicable series, or any class of that series,
the consent of the holders of which is required to direct the
related bond trustee to liquidate the mortgage collateral for
that series;
- modify any of the provisions of the related indenture
regarding the calculation of the amount of any payment of
interest or principal due and payable on any bond on any
payment date, or to affect the rights of the holders of bonds
to the benefit of any provisions for the mandatory redemption
of those bonds; or
- modify the provisions of the related indenture regarding any
modifications of that indenture requiring consent of the
holders of bonds, except to increase the percentage of voting
rights held by holders required to consent to those
modifications of that indenture or to provide that additional
provisions of the related indenture cannot be modified or
waived without the consent of the holder of each bond affected
thereby.
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ISSUER EVENTS OF DEFAULT. We will specify in the related prospectus
supplement the issuer events of default with respect to any series of offered
bonds and the available remedies, including the circumstances under which those
bonds may be declared due and payable and the related trust estate may be
liquidated in connection with any of those issuer events of default.
AUTHENTICATION AND DELIVERY OF BONDS. The issuer for any
series of offered bonds may from time to time deliver bonds of that series
executed by it to the related bond trustee and order that trustee to
authenticate those bonds. Upon the receipt of those bonds and that order, and
subject to the related issuer's compliance with conditions specified in the
related indenture, that bond trustee will authenticate and deliver those bonds
as the related issuer may direct. Unless otherwise specified in the related
prospectus supplement, the related bond trustee will be authorized to appoint an
agent for purposes of authenticating and delivering the bonds of any series.
SATISFACTION AND DISCHARGE OF THE INDENTURE. The indenture for
any series of offered bonds will be discharged as to those bonds and any
non-offered bonds of the same series, except with respect to some continuing
rights specified in that indenture, either:
- upon the delivery to the related bond trustee or other bond
registrar for cancellation all the bonds of that series--
1. other than bonds which have been mutilated, lost or
stolen and have been replaced or paid, and
2. bonds for which money has been deposited in trust for
the full payment of those bonds, and thereafter
repaid to the related issuer or discharged from that
trust, as provided in that indenture; or
- when--
1. all bonds of that series not previously canceled by
the related bond trustee or other bond registrar have
become due and payable or, within one year, will
become due and payable or be called for redemption,
and
2. the related issuer has deposited with the related
bond trustee an amount sufficient to repay all of the
bonds of that series;
provided that the related issuer has paid all other amounts payable under the
related indenture and other conditions specified in the related indenture have
been satisfied.
RELEASE OF COLLATERAL. Mortgage collateral for any series of offered
bonds may be released from the lien of the related indenture:
- upon satisfaction and discharge of that indenture;
- in connection with the liquidation of a defaulted
mortgage loan or any real property acquired as part
of the related trust estate with respect to a
defaulted mortgage loan;
- in connection with a material breach of a
representation and warranty or the failure to deliver
some required material documentation with respect to
a particular item of mortgage collateral;
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- as contemplated under "Description of the Trust
Estates--Substitution, Acquisition and Release of
Mortgage Collateral;" and
- as otherwise specified in the related prospectus
supplement.
COMPLIANCE CERTIFICATES AND OPINIONS. In connection with--
- the authentication and delivery of any series of
offered bonds at initial issuance,
- the release or the release and substitution of
property subject to the lien of the related
indenture,
- the satisfaction and discharge of the related
indenture, and
- any application or request by the related issuer
to the related bond trustee to take any action
under any provision of the related indenture,
the related issuer will be required to furnish to the related bond trustee:
- an officer's certificate stating that all conditions
precedent, if any, provided for in the related
indenture relating to the proposed action have been
complied with,
- an opinion of counsel stating that in the opinion of
that counsel all of those conditions precedent, if
any, have been complied with, and
- if required by the Trust Indenture Act, a certificate
or opinion from an accountant stating that in the
opinion of that accountant all of those conditions
precedent, if any, subject to verification by
accountants have been complied with.
In connection with the authentication and delivery of any series of offered
bonds at initial issuance, the accountant rendering the certificate or opinion
referred to in the third bullet point of the preceding sentence is to be an
accountant independent of the related issuer, us or any of our affiliates that
was selected or approved by the related bond trustee in the exercise of
reasonable care.
Each of the certificates or opinions with respect to
compliance with a condition or covenant will be required to include:
- a statement that each signatory of that certificate
or opinion has read or has caused to be read that
covenant or condition;
- a brief statement as to the nature and scope of the
examination or investigation upon which the
statements or opinions contained in that certificate
or opinion are based;
- a statement that, in the opinion of each signatory,
that signatory has made any examination or
investigation as is necessary to enable that
signatory to express an informed opinion as to
whether or not that covenant or condition has been
complied with; and
- a statement as to whether, in the opinion of each
signatory, that condition or covenant has been
complied with.
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In addition, the issuer for each series of offered bonds will be
required to file annually with the related bond trustee a written statement as
to fulfillment of its obligations under the related indenture.
LIST OF BONDHOLDERS. Three or more holders of bonds of any series which
have each owned those bonds for at least six months may, by written application
to the related bond trustee, request access to the list maintained by that
trustee of all holders of the same series for the purpose of communicating with
other bondholders of that series with respect to their rights under the related
indenture. The related bond trustee will be required, with limited exception, to
afford those applicants access to the most recent form of that list in the
possession of the related bond trustee or, at the expense of those applicants,
to mail copies of the particular communication to the other bondholders of the
same series.
MEETINGS OF BONDHOLDERS. Meetings of bondholders of any series or class
may be called at any time and from time to time in connection with any of the
following acts:
- to give any notice to the related issuer or the
related bond trustee;
- to give directions to the related bond trustee;
- to consent to the waiver of any issuer event of
default under the related indenture;
- to remove the related bond trustee and appoint a
successor bond trustee;
- to consent to the execution of supplemental
indentures; or
- to take any other action authorized to be taken by or
on behalf of those bondholders.
Those meetings may be called by the related bond trustee, the related issuer or
the holders of bonds of the applicable series representing at least 10%, or any
other percentage specified in the related prospectus supplement, of the related
voting rights.
FISCAL YEAR. The fiscal year of each issuer of a series of offered
bonds ends on December 31.
TRUSTEE'S ANNUAL REPORT. The bond trustee for each series of offered
bonds will be required to mail each year to all bondholders of that series, a
brief report relating to its eligibility and qualification to continue as the
bond trustee under the related indenture, any amounts advanced by it under the
related indenture which remain unpaid on the date of that report, the amount,
interest rate and maturity date of any indebtedness owing by the related issuer,
or any other obligor on the bonds of that series, to that bond trustee in its
individual capacity, the property and funds physically held by that bond trustee
in that capacity, any release or release and substitution of property subject
to the lien of the related mortgage which has not been previously reported,
any additional issuance of bonds of the same issuer not previously reported
and any action taken by that bond trustee which materially affects the bonds
of that series and which has not been previously reported.
AGENTS OF THE ISSUER. The issuer for any series of offered bonds may
contract with other persons or entities to assist it in performing its duties
under the related indenture, including specified administrative and accounting
matters relating to the bonds of that series. Any performance of those duties,
other than execution of issuer orders, issuer requests and officer's
certificates of the issuer, by a person or entity identified to the related bond
trustee in an officer's certificate of the related issuer, will be deemed action
taken by that issuer for all purposes under the applicable indenture.
THE BOND TRUSTEE.
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GENERAL. The bond trustee for each series of offered bonds will be
named in the related prospectus supplement. That bond trustee will be a bank,
trust company, corporation or association qualified under the Trust Indenture
Act of 1939, as amended. The bank, trust company, corporation or association
that serves as bond trustee for any series of offered bonds may have typical
banking relationships with us and our affiliates and with any related master
servicer, special servicer or manager or its affiliates.
MATTERS REGARDING THE BOND TRUSTEE. If no event of default on the part
of the related issuer or any related master servicer, special servicer or
manager has occurred and is continuing, the bond trustee for each series of
offered bonds will be required to perform only those duties specifically
required under the related indenture and the related servicing and
administration agreement(s).
As and to the extent described in the related prospectus supplement,
the fees and normal disbursements of the bond trustee for each series of offered
bonds may be an expense of the related issuer, master servicer or other
specified person or entity or may be payable out of collections on the related
mortgage collateral.
Unless otherwise specified in the related prospectus supplement, the
bond trustee for each series of offered bonds will be entitled to
indemnification, from assets in the related trust estate, for any loss,
liability or expense incurred by that bond trustee in connection with its
acceptance or administration of its trusts under the related indenture and the
related servicing and administration agreement(s). However, that indemnification
will not extend to any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence on the part of that bond trustee in
the performance of its obligations and duties under those documents.
The rights of the bond trustee for any series of offered bonds to
receive, out of the assets of the related trust estate, any compensation or
reimbursement to which it is entitled under the related indenture or any related
servicing and administration agreement, will be senior to the rights of the
holders of those bonds to receive payments on those bonds.
No bond trustee for a series of offered bonds will be required to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties under the related indenture or any related
servicing and administration agreement, or in the exercise of any of its rights
or powers, if it has reasonable grounds for believing that repayment of those
funds or adequate indemnity against that risk or liability is not reasonably
assured to it.
The bond trustee for each series of offered bonds will be entitled to
execute any of its trusts or powers under the related indenture or any related
servicing and administration agreement, or to perform any of its duties under
that indenture or related servicing and administration agreement, either
directly or by or through agents or attorneys. However, that bond trustee
will generally not be responsible for any willful misconduct or gross
negligence on the part of any agent or attorney appointed by it with due care.
RESIGNATION AND REMOVAL OF THE BOND TRUSTEE. The bond trustee for any
series of offered bonds may resign at any time, in which event we or the related
issuer will be obligated to appoint a successor bond trustee. We or the related
issuer may also remove the bond trustee for a series of offered bonds if that
bond trustee ceases to be eligible to continue in that capacity under the
related indenture or if that bond trustee becomes insolvent. Upon becoming aware
of those circumstances, we or the related issuer will be obligated to appoint a
successor bond trustee. In addition, unless otherwise specified in the related
prospectus supplement, the bond trustee for any series of offered bonds may also
be removed at any time by the holders of bonds, including non-offered bonds, of
that series representing more than 50% of the voting rights of that series.
However, if that removal was without cause, the bondholders effecting the
removal may be responsible for any costs and expenses incurred by the terminated
bond trustee in connection with its removal. Any resignation or removal of the
bond trustee for a series of offered bonds and the appointment of a successor
bond trustee for that series will not become effective until acceptance of the
appointment by that successor bond trustee.
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THE SERVICING AND ADMINISTRATION AGREEMENT(S)
GENERAL. In general, with respect to each series of offered bonds, a
servicing and administration agreement or other similar agreement or collection
of agreements will govern the servicing and administration of the related
mortgage collateral to the extent that those matters are not covered by the
related indenture. The parties to the servicing and administration agreement(s)
for any series of offered bonds will in all cases include the related issuer and
the related bond trustee.
If the mortgage collateral for a series of offered bonds includes
mortgage loans, the parties to the related servicing and administration
agreement(s) will also include--
- a master servicer that will generally be responsible
for performing customary servicing duties with
respect to those mortgage loans that are not
defaulted, nonperforming or otherwise problematic in
any material respect, and
- a special servicer that will generally be responsible
for servicing and administering those mortgage loans
that are defaulted, nonperforming or otherwise
problematic in any material respect and real estate
assets acquired with respect to defaulted mortgage
loans.
The same person or entity, or affiliated entities, may act as both master
servicer and special servicer for any series of offered bonds.
If the mortgage collateral for a series of offered bonds includes
mortgage-backed securities, the parties to the related servicing and
administration agreement(s) may also include a manager that will be responsible
for performing various administrative duties with respect to those
mortgage-backed securities. If the related bond trustee assumes those duties,
however, there will be no manager.
In the related prospectus supplement, we will identify any master
servicer, special servicer or manager for each series of offered bonds and will
describe their respective duties in further detail. If we so specify in the
related prospectus supplement, a party from whom we acquire mortgage assets or
one of its affiliates may perform the functions of master servicer, special
servicer or manager for the series of offered bonds secured by those mortgage
assets. If we so specify in the related prospectus supplement, the same person
or entity may act as both master servicer and special servicer for a series of
offered bonds.
COLLECTION AND OTHER SERVICING PROCEDURES WITH RESPECT TO MORTGAGE
LOANS. In general, the related master servicer and special servicer, directly or
through sub-servicers, will be obligated to service and administer for the
benefit of the related bondholders the mortgage loans securing any series of
offered bonds. The master servicer and the special servicer will be required to
service and administer those mortgage loans in accordance with applicable law
and, further, in accordance with the terms of the related servicing and
administration agreement(s), the mortgage loans themselves and any instrument of
credit support included as part of the related trust estate. Subject to the
foregoing, the master servicer and the special servicer will each have full
power and authority to do any and all things in connection with that servicing
and administration that it may deem necessary and desirable.
As part of its servicing duties, each of the master servicer and the
special servicer for a series of offered bonds will be required to make
reasonable efforts to collect all payments called for under the terms and
provisions of the related mortgage loans that it services and, in general, will
be obligated to follow the same collection procedures as it would follow for
comparable mortgage loans held for its own account, provided that:
- those procedures are consistent with the terms of the related
servicing and administration agreement(s); and
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- they do not impair recovery under any instrument of credit
support included as part of the related trust estate.
Consistent with the foregoing, the master servicer and the special servicer will
each be permitted, in its discretion, to waive any default charge in connection
with collecting a late payment on any defaulted mortgage loan.
The master servicer and/or the special servicer for a series of offered
bonds, directly or through sub-servicers, will also be required to perform
various other customary functions of a servicer of comparable loans, including:
- maintaining escrow or impound accounts for the payment of
taxes, insurance premiums, ground rents and similar items, or
otherwise monitoring the timely payment of those items;
- ensuring that the related properties are properly insured;
- attempting to collect delinquent payments;
- supervising foreclosures;
- negotiating modifications;
- responding to borrower requests for partial releases of the
encumbered property, easements, consents to alteration or
demolition and similar matters;
- protecting the interests of bondholders with respect to senior
lienholders;
- conducting inspections of the related real properties on a
periodic or other basis;
- collecting and evaluating financial statements for the related
real properties;
- managing or overseeing the management of real properties
acquired as part of the related trust estate through
foreclosure, deed-in-lieu of foreclosure or otherwise; and
- maintaining servicing records relating to mortgage loans in
the related trust estate.
We will specify in the related prospectus supplement when, and the
extent to which, servicing of a mortgage loan is to be transferred from a master
servicer to a special servicer. In general, a special servicer for any series of
offered bonds will be responsible for the servicing and administration of:
- mortgage loans that are delinquent with respect to a specified
number of scheduled payments;
- mortgage loans as to which there is a material non-monetary
default;
- mortgage loans as to which the related borrower has--
1. entered into or consented to bankruptcy, appointment
of a receiver or conservator or similar insolvency
proceeding, or
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2. become the subject of a decree or order for such a
proceeding which has remained in force undischarged
or unstayed for a specified number of days; and
- real properties acquired as part of the related trust estate
with respect to defaulted mortgage loans.
The related servicing and administration agreement(s) may also may provide that
if a default on a mortgage loan has occurred or, in the judgment of the related
master servicer, a payment default is reasonably foreseeable, the related master
servicer may elect to transfer the servicing of that mortgage loan, in whole or
in part, to the related special servicer. When the circumstances no longer
warrant a special servicer's continuing to service a particular mortgage loan,
such as when the related borrower is paying in accordance with the forbearance
arrangement entered into between the special servicer and that borrower, the
master servicer will generally resume the servicing duties with respect to the
particular mortgage loan.
A borrower's failure to make required mortgage loan payments may mean
that operating income from the related real property is insufficient to service
the mortgage debt, or may reflect the diversion of that income from the
servicing of the mortgage debt. In addition, a borrower that is unable to make
mortgage loan payments may also be unable to make timely payment of taxes and
otherwise to maintain and insure the related real property.
In general, with respect to each series of offered bonds, the related
special servicer will be required to--
- monitor any mortgage loan in the related trust estate that is
in default,
- evaluate whether the causes of the default can be corrected
over a reasonable period without significant impairment of the
value of the related real property,
- initiate corrective action in cooperation with the borrower if
cure is likely,
- inspect the related real property, and
- take any other actions as it deems necessary and appropriate.
A significant period of time may elapse before a special servicer is
able to assess the success of any corrective action or the need for additional
initiatives. The time within which a special servicer can--
- make the initial determination of appropriate action,
- evaluate the success of corrective action,
- develop additional initiatives,
- institute foreclosure proceedings and actually foreclose, or
- accept a deed to a real property in lieu of foreclosure,
on behalf of the bondholders and issuer of the related series, may vary
considerably depending on the particular mortgage loan, the related real
property, the borrower, the presence of an acceptable party to assume the
mortgage loan and the laws of the jurisdiction in which the related real
property is located. If a borrower files a bankruptcy petition, the special
servicer may not be permitted to accelerate the maturity of the defaulted loan
or to foreclose on
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the related real property for a considerable period of time. See "Legal Aspects
of the Mortgage Loans--Bankruptcy Laws."
A special servicer for any series of offered bonds may also perform
limited duties with respect to mortgage loans in the related trust estate for
which the related master servicer is primarily responsible, such as--
- performing property inspections, and
- collecting and evaluating financial statements.
A master servicer for any series of offered bonds may perform limited
duties with respect to any mortgage loan in the related trust estate for which
the related special servicer is primarily responsible, such as--
- continuing to receive payments on the mortgage loan,
- making calculations with respect to the mortgage loan, and
- making remittances and preparing reports to the related bond
trustee and/or bondholders with respect to the mortgage loan.
The duties of the master servicer and special servicer for
your series will be more fully described in the related
prospectus supplement.
Unless we state otherwise in the related prospectus supplement, the
master servicer for your series will be responsible for filing and settling
claims with respect to particular mortgage loans for your series under any
applicable instrument of credit support. See "Description of Credit Support" in
this prospectus.
SUB-SERVICERS. A master servicer or special servicer may delegate its
servicing obligations to one or more third-party servicers or sub-servicers.
However, unless we specify otherwise in the related prospectus supplement, the
master servicer or special servicer will remain obligated under the related
servicing and administration agreement(s). Each sub-servicing agreement between
a master servicer or special servicer, as applicable, and a sub-servicer must
provide for servicing of the applicable mortgage loans consistent with the
related servicing and administration agreement(s). Any master servicer and
special servicer for a series of offered bonds will each be required to monitor
the performance of sub-servicers retained by it.
Unless we specify otherwise in the related prospectus supplement, any
master servicer or special servicer for a series of offered bonds will be solely
liable for all fees owed by it to any sub-servicer, regardless of whether the
master servicer's or special servicer's compensation under the related servicing
and administration agreement(s) is sufficient to pay those fees. Each
sub-servicer will be entitled to reimbursement from the master servicer or
special servicer, as the case may be, that retained it, for some expenditures
which it makes, generally to the same extent that the master servicer or special
servicer, as the case may be, would be reimbursed under the related servicing
and administration agreement(s).
COLLECTION OF PAYMENTS ON MORTGAGE-BACKED SECURITIES. Unless we specify
otherwise in the related prospectus supplement, if a mortgage-backed security is
included among the trust assets securing any series of offered bonds, then--
- that mortgage-backed security will be registered in the name
of the related bond trustee or its designee;
- the related trustee will receive payments on that
mortgage-backed security; and
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- subject to any conditions described in the related prospectus
supplement, the related trustee or a designated manager will,
on behalf and at the expense of the related trust estate,
exercise all rights and remedies with respect to that
mortgaged-backed security, including the prosecution of any
legal action necessary in connection with any payment default.
MATTERS REGARDING THE MASTER SERVICER, THE SPECIAL SERVICER, THE
MANAGER AND THE ISSUER. Unless we specify otherwise in the related prospectus
supplement, no master servicer, special servicer or manager for any series of
offered bonds may resign from its obligations in that capacity, except upon--
- the appointment of, and the acceptance of that appointment by,
a successor to the resigning party and receipt by the related
bond trustee of written confirmation from each applicable
rating agency that the resignation and appointment will not
result in a withdrawal or downgrade of any rating assigned by
that rating agency to any class of bonds, including
non-offered bonds, of that series, or
- a determination that those obligations are no longer
permissible under applicable law or are in material conflict
by reason of applicable law with any other activities carried
on by the resigning party.
In general, no resignation will become effective until the related bond
trustee or other successor has assumed the obligations and duties of the
resigning master servicer, special servicer or manager, as the case may be.
In no event will any issuer, master servicer, special servicer or
manager for any series of offered bonds, or any of their respective directors,
officers, employees or agents, be under any liability to the related trust
estate or bondholders for any action taken, or not taken, in good faith under to
the related servicing and administration agreement(s) or for errors in judgment.
None of those persons or entities will be protected, however, against any
liability that would otherwise be imposed by reason of willful misfeasance, bad
faith or gross negligence in the performance of obligations or duties under the
related servicing and administration agreement(s) or by reason of reckless
disregard of those obligations and duties.
Furthermore, the servicing and administration agreement(s) for each
series of offered bonds will entitle the issuer, master servicer, special
servicer and/or manager for that series, and their respective directors,
officers, employees and agents, to indemnification out of the assets of the
related trust estate for any loss, liability or expense incurred in connection
with any legal action that relates to those bonds, any non-offered bonds of the
same series, the servicing and administration agreement(s) for that series or
the related trust estate. The indemnification will not extend, however, to any
loss, liability or expense:
- specifically required to be borne by the relevant party,
without right of reimbursement, under the terms of the related
servicing and administration agreement(s);
- incurred in connection with any legal action against the
relevant party resulting from any breach of a representation
or warranty made in the related servicing and administration
agreement(s); or
- incurred in connection with any legal action against the
relevant party resulting from any willful misfeasance, bad
faith or gross negligence in the performance of obligations or
duties under the related servicing and administration
agreement(s).
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None of the issuer or any master servicer, special servicer or manager
for a series of offered bonds will be under any obligation to appear in,
prosecute or defend any legal action unless:
- the action is related to the respective responsibilities of
that party under the related servicing and administration
agreement(s); and
- either--
1. that party is specifically required to bear the
expense of the action, or
2. the action will not, in its opinion, involve that
party in any ultimate expense or liability for which
it would not be reimbursed under the related
servicing and administration agreement(s).
However, each of those parties may undertake any legal action that it may deem
necessary or desirable with respect to the enforcement or protection of the
rights and duties of the parties to the related servicing and administration
agreement(s) and the interests of the related bondholders under those
agreements. In that event, the legal expenses and costs of the action, and any
liability resulting from the action, will be expenses, costs and liabilities of
the related trust estate and payable out of the assets of that trust estate.
With limited exception, any person or entity--
- into which the issuer or any master servicer, special servicer
or manager for a series of offered bonds may be merged or
consolidated, or
- resulting from any merger or consolidation to which the issuer
or any master servicer, special servicer or manager for a
series of offered bonds is a party, or
- succeeding to the business of the issuer or any master
servicer, special servicer or manager for a series of offered
bonds,
will be the successor of the issuer, master servicer, special servicer or
manager, as the case may be, under the related servicing and administration
agreement(s).
The compensation arrangements with respect to any master servicer,
special servicer or manager for any series of offered bonds will be set forth in
the related prospectus supplement. In general, that compensation will be payable
out of the assets of the related trust estate.
SERVICING AND ADMINISTRATION EVENTS OF DEFAULT. We will identify in
related prospectus supplement the various events of default under the servicing
and administration agreement(s) for each series of offered bonds for which any
related master servicer, special servicer or manager may be terminated in that
capacity.
AMENDMENT. The servicing and administration agreement(s) for each
series of offered bonds may be amended by the parties to those agreements,
without the consent of any of the holders of those bonds, or of any non-offered
bonds of the same series, for the following reasons:
1. to cure any ambiguity;
2. to correct, modify or supplement any provision in
those servicing and administration agreement(s) which
may be inconsistent with any other provision in those
agreements, or with the description of those
agreements set forth in the related prospectus
supplement;
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3. to add any other provisions with respect to matters
or questions arising under those servicing and
administration agreement(s) that are not inconsistent
with the existing provisions of those agreements;
4. to the extent applicable, to relax or eliminate any
requirement under those servicing and administration
agreement(s) imposed by the provisions of the
Internal Revenue Code of 1986 relating to REMICs if
the provisions of that Code are amended or clarified
so as to allow for the relaxation or elimination of
that requirement;
5. to comply with any requirements imposed by the
Internal Revenue Code of 1986 or any final, temporary
or, in some cases, proposed regulation, revenue
ruling, revenue procedure or other written official
announcement or interpretation relating to federal
income tax laws, or to avoid a prohibited transaction
or reduce the incidence of any tax that would arise
from any actions taken with respect to the operation
of any REMIC or REIT created under the applicable
Governing Documents; or
6. to otherwise modify or delete existing provisions of
those servicing and administration agreement(s).
However, no amendment of the servicing and administration agreement(s)
for any series of offered bonds covered solely by clause 3 or 6 above, may
adversely affect in any material respect the interests of any holders of offered
or non-offered bonds of that series.
In general, the servicing and administration agreement(s) for a series
of offered bonds may also be amended by the parties to that document, with the
consent of the holders of offered and non-offered bonds representing, in
total, greater than 50%, or any other percentage specified in the related
prospectus supplement, of all the related voting rights. However, no such
amendment of the servicing and administration agreement(s) for a series of
offered bonds may materially adversely affect the interests of the holders of
any class of offered or non-offered bonds of that series without the consent of
the holders of all bonds of that class.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
Credit support may be provided with respect to one or more classes of
the offered bonds of any series or with respect to the related mortgage
collateral. That credit support may be in the form of any of the following:
- the subordination of one or more other classes of bonds of the
same series;
- the use of a letter of credit, a surety bond, an insurance
policy, a guarantee or a credit derivative;
- the establishment of one or more reserve funds; or
- any combination of the foregoing.
If and to the extent described in the related prospectus supplement,
any of the above forms of credit support may provide credit enhancement for
non-offered bonds, as well as offered bonds, or for more than one series of
bonds.
If you are the beneficiary of any particular form of credit support,
that credit support may not protect you against all risks of loss and will not
guarantee payment to you of all amounts to which you are entitled
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under your offered bonds. If losses or shortfalls occur that exceed the amount
covered by that credit support or that are of a type not covered by that credit
support, you will bear your allocable share of deficiencies. Moreover, if that
credit support covers the offered bonds of more than one class or series and
total losses on the related mortgage collateral exceed the amount of that credit
support, it is possible that the holders of offered bonds of other classes
and/or series will be disproportionately benefited by that credit support to
your detriment.
If you are the beneficiary of any particular form of credit support, we
will include in the related prospectus supplement a description of the
following:
- the nature and amount of coverage under that credit support;
- any conditions to payment not otherwise described in this
prospectus;
- any conditions under which the amount of coverage under that
credit support may be reduced and under which that credit
support may be terminated or replaced; and
- the material provisions relating to that credit support.
Additionally, we will set forth in the related prospectus supplement information
with respect to the obligor, if any, under any instrument of credit support.
SUBORDINATE BONDS
If and to the extent described in the related prospectus supplement,
one or more classes of bonds of any series may be subordinate to one or more
other classes of bonds of that series. If you purchase subordinate bonds, your
right to receive payments out of collections and advances on the assets of the
related trust estate on any payment date will be subordinated to the
corresponding rights of the holders of the more senior classes of bonds. If and
to the extent described in the related prospectus supplement, the subordination
of a class of bonds may apply only in the event of specified types of losses or
shortfalls. In the related prospectus supplement, we will set forth information
concerning the method and amount of subordination provided by a class or classes
of subordinate bonds in a particular series and the circumstances under which
that subordination will be available.
INSURANCE OR GUARANTEES WITH RESPECT TO MORTGAGE LOANS
The mortgage loans included as part of the mortgage collateral
for any series of offered bonds may be covered for some default risks by
insurance policies or guarantees. If so, we will describe in the related
prospectus supplement the nature of those default risks and the extent of that
coverage.
LETTER OF CREDIT
If and to the extent described in the related prospectus
supplement, deficiencies in amounts otherwise payable on a series of offered
bonds or some classes of those bonds will be covered by one or more letters
of credit, issued by a bank or other financial institution specified in the
related prospectus supplement. The issuer of the letter of credit will be
obligated to honor draws under that letter of credit in a total fixed dollar
amount, net of unreimbursed payments under the letter of credit, generally
equal to a percentage specified in the related prospectus supplement of the
total principal balance of some or all of the related mortgage assets as of
the date they are pledged to secure a series of offered bonds or of the
initial total principal balance of one or more classes of bonds of the
applicable series. The letter of credit may permit draws only in the event of
select types of losses and shortfalls. The amount available under the letter
of credit will, in all cases, be reduced to the extent of the unreimbursed
payments under the letter of credit and may otherwise be reduced as described
in the related prospectus supplement. The obligations of the letter of credit
issuer under the letter of credit for any series of offered bonds will expire
at the earlier of the date specified in the related prospectus supplement or
the satisfaction and discharge of the related indenture.
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INSURANCE POLICIES AND SURETY BONDS
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered bonds or on
particular classes of those bonds will be covered by insurance policies or
surety bonds provided by one or more insurance companies or sureties. Those
instruments may cover, with respect to one or more classes of the offered
bonds of the related series, timely payments of interest and principal or
timely payments of interest and payments of principal on the basis of a
schedule of principal payments set forth in or determined in the manner
specified in the related prospectus supplement. We will describe in the
related prospectus supplement any limitations on the draws that may be made
under any of those instruments.
CREDIT DERIVATIVE
If and to the extent described in the related prospectus supplement ,
deficiencies in amounts otherwise payable on a series of offered bonds or on
select classes of those bonds will be covered by credit derivatives, such as
credit default swaps and total return swaps. A credit derivative is a financial
instrument designed to offset losses and shortfalls derived from the credit risk
of an underlying or reference asset or the credit risk of an underlying or
reference credit. We will describe in the related prospectus supplement when and
how payments are made under any of those instruments and the specific credit
risk that is being covered.
RESERVE FUNDS
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered bonds or on
select classes of those bonds will be covered, to the extent of available funds,
by one or more reserve funds in which cash, a letter of credit, permitted
investments, a demand note or a combination of the foregoing, will be deposited,
in the amounts specified in the related prospectus supplement. If and to the
extent described in the related prospectus supplement, the reserve fund for the
related series of offered bonds may also be funded over time.
Amounts on deposit in any reserve fund for a series of offered bonds
will be applied for the purposes, in the manner, and to the extent specified in
the related prospectus supplement. If and to the extent described in the related
prospectus supplement, reserve funds may be established to provide protection
only against select types of losses and shortfalls. Following each payment date
for the related series of offered bonds, amounts in a reserve fund in excess of
any required balance may be released from the reserve fund under the conditions
and to the extent specified in the related prospectus supplement.
CREDIT SUPPORT WITH RESPECT TO MBS
If and to the extent described in the related prospectus supplement,
any mortgage-backed security included in one of our trusts and/or the mortgage
loans that back that security may be covered by one or more of the types of
credit support described in this prospectus. We will specify in the related
prospectus supplement, as to each form of related credit support, the
information indicated above with respect to that mortgage-backed security, to
the extent that the information is material and available.
LEGAL ASPECTS OF THE MORTGAGE LOANS
Most, if not all, of the mortgage loans that secure or underlie the
security for a series of offered bonds will, in turn, be secured by multifamily
and commercial properties in the United States, its territories and possessions.
However, some of those mortgage loans may be secured by multifamily and
commercial properties outside the United States, its territories and
possessions.
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The following discussion contains general summaries of select legal
aspects of the mortgage loans secured by multifamily and commercial properties
in the United States. Because these legal aspects are governed by applicable
state law, which may differ substantially from state to state, the summaries do
not purport to be complete, to reflect the laws of any particular state, or to
encompass the laws of all jurisdictions in which the security for the mortgage
loans securing or underlying the security for a series of offered bonds, is
situated. Accordingly, you should be aware that the summaries are qualified in
their entirety by reference to the applicable laws of those states. See
"Description of the Trust Estates--Mortgage Loans."
If a significant percentage of mortgage loans backing a series of
offered bonds are secured by properties in a particular state, we will discuss
the relevant state laws, to the extent they vary materially from this
discussion, in the related prospectus supplement.
GENERAL
Each mortgage loan backing a series of offered bonds will be evidenced
by a note or bond and secured by an instrument granting a security interest in
real property. The instrument granting a security interest in real property may
be a mortgage, deed of trust or a deed to secure debt, depending upon the
prevailing practice and law in the state in which that real property is located.
Mortgages, deeds of trust and deeds to secure debt are often collectively
referred to in this prospectus as "mortgages." A mortgage creates a lien upon,
or grants a title interest in, the real property covered by the mortgage, and
represents the security for the repayment of the indebtedness customarily
evidenced by a promissory note. The priority of the lien created or interest
granted will depend on--
- the terms of the mortgage,
- the terms of separate subordination agreements or
intercreditor agreements with others that hold interests in
the real property,
- the knowledge of the parties to the mortgage, and
- in general, the order of recordation of the mortgage in the
appropriate public recording office.
However, the lien of a recorded mortgage will generally be subordinate to
later-arising liens for real estate taxes and assessments and other charges
imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage--
- a mortgagor, who is the owner of the encumbered interest in
the real property, and
- a mortgagee, who is the lender.
In general, the mortgagor is also the borrower.
In contrast, a deed of trust is a three-party instrument. The parties
to a deed of trust are--
- the trustor, who is the equivalent of a mortgagor,
- the trustee to whom the real property is conveyed, and
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- the beneficiary for whose benefit the conveyance is made, who
is the lender.
Under a deed of trust, the trustor grants the property, irrevocably until the
debt is paid, in trust and generally with a power of sale, to the trustee to
secure repayment of the indebtedness evidenced by the related note.
A deed to secure debt typically has two parties. Under a deed to secure
debt, the grantor, who is the equivalent of a mortgagor, conveys title to the
real property to the grantee, who is the lender, generally with a power of sale,
until the debt is repaid.
Where the borrower is a land trust, there would be an additional party
because legal title to the property is held by a land trustee under a land trust
agreement for the benefit of the borrower. At origination of a mortgage loan
involving a land trust, the borrower may execute a separate undertaking to make
payments on the mortgage note. In no event is the land trustee personally liable
for the mortgage note obligation.
The mortgagee's authority under a mortgage, the trustee's authority
under a deed of trust and the grantee's authority under a deed to secure debt
are governed by:
- the express provisions of the related instrument,
- the law of the state in which the real property is located,
- some federal laws, and
- in some deed of trust transactions, the directions of the
beneficiary.
LEASES AND RENTS
A mortgage that encumbers an income-producing property often contains
an assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases. Under an assignment of rents and leases, the
borrower assigns to the lender the borrower's right, title and interest as
landlord under each lease and the income derived from each lease. However, the
borrower retains a revocable license to collect the rents, provided there is no
default and the rents are not directly paid to the lender. If the borrower
defaults, the license terminates and the lender is entitled to collect the
rents. Local law may require that the lender take possession of the property
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. Room rates are generally pledged by the borrower as
additional security for the loan when a mortgage loan is secured by a hotel or
motel. In general, the lender must file financing statements in order to perfect
its security interest in the room rates and must file continuation statements,
generally every five years, to maintain that perfection. Mortgage loans secured
by hotels or motels may be included in the mortgage collateral for a series of
offered bonds even if the security interest in the room rates was not perfected
or the requisite UCC filings were allowed to lapse. A lender will generally be
required to commence a foreclosure action or otherwise take possession of the
property in order to enforce its rights to collect the room rates following a
default, even if the lender's security interest in room rates is perfected under
applicable nonbankruptcy law.
In the bankruptcy setting, the lender will be stayed from enforcing its
rights to collect hotel and motel room rates. However, the room rates will
constitute cash collateral and cannot be used by the bankrupt borrower--
- without a hearing or the lender's consent, or
- unless the lender's interest in the room rates is given
adequate protection.
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For purposes of the foregoing, the adequate protection may include a cash
payment for otherwise encumbered funds or a replacement lien on unencumbered
property, in either case equal in value to the amount of room rates that the
bankrupt borrower proposes to use. See "--Bankruptcy Laws" below.
PERSONALTY
Some types of income-producing real properties, such as hotels, motels
and nursing homes, may include personal property, which may, to the extent it is
owned by the borrower and not previously pledged, constitute a significant
portion of the property's value as security. The creation and enforcement of
liens on personal property are governed by the UCC. Accordingly, if a borrower
pledges personal property as security for a mortgage loan, the lender generally
must file UCC financing statements in order to perfect its security interest in
the personal property and must file continuation statements, generally every
five years, to maintain that perfection. Mortgage loans secured in part by
personal property may be included as part of the mortgage collateral for a
series of offered bonds even if the security interest in the personal property
was not perfected or the requisite UCC filings were allowed to lapse.
FORECLOSURE
GENERAL. Foreclosure is a legal procedure that allows the lender to
recover its mortgage debt by enforcing its rights and available legal remedies
under the mortgage. If the borrower defaults in payment or performance of its
obligations under the note or mortgage, the lender has the right to institute
foreclosure proceedings to sell the real property security at public auction to
satisfy the indebtedness.
FORECLOSURE PROCEDURES VARY FROM STATE TO STATE. The two primary
methods of foreclosing a mortgage are--
- judicial foreclosure, involving court proceedings, and
- nonjudicial foreclosure under a power of sale granted in the
mortgage instrument.
Other foreclosure procedures are available in some states, but they are
either infrequently used or available only in limited circumstances.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses are raised or counterclaims are interposed. A
foreclosure action sometimes requires several years to complete.
JUDICIAL FORECLOSURE. A judicial foreclosure proceeding is conducted in
a court having jurisdiction over the mortgaged property. Generally, a lender
initiates the action 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. The court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property upon successful completion of a
judicial foreclosure proceeding. The proceeds of that public sale are used to
satisfy the judgment. The procedures that govern these public sales vary from
state to state.
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EQUITABLE AND OTHER LIMITATIONS ON ENFORCEABILITY OF SOME PROVISIONS.
United States courts have traditionally imposed general equitable principles to
limit the remedies available to lenders in foreclosure actions. These principles
are generally designed to relieve borrowers from the effects of mortgage
defaults perceived as harsh or unfair. Relying on those 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;
- require the lender to undertake affirmative actions to
determine the cause of the borrower's default and the
likelihood that the borrower will be able to reinstate the
loan;
- require the lender to reinstate a loan or recast a payment
schedule in order to accommodate a borrower that is suffering
from a temporary financial disability; or
- limit the right of the lender to foreclose in the case of a
nonmonetary default, such as--
1. a failure to adequately maintain the mortgaged
property, or
2. an impermissible further encumbrance of the mortgaged
property.
Some courts have addressed the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have--
- upheld the reasonableness of the notice provisions, or
- found that a public sale under a mortgage providing for a
power of sale does not involve sufficient state action to
trigger constitutional protections.
In addition, some states may have statutory protection such as the
right of the borrower to reinstate its mortgage loan after commencement of
foreclosure proceedings but prior to a foreclosure sale.
NONJUDICIAL FORECLOSURE/POWER OF SALE. In states permitting nonjudicial
foreclosure proceedings, foreclosure of a deed of trust is generally
accomplished by a nonjudicial trustee's sale under a power of sale typically
granted in the deed of trust. A power of sale may also be contained in any other
type of mortgage instrument if applicable law so permits. A power of sale under
a deed of trust allows a nonjudicial public sale to be conducted generally
following--
- a request from the beneficiary/lender to the trustee to sell
the property upon default by the borrower, and
- notice of sale is given in accordance with the terms of the
deed of trust and applicable state law.
In some states, prior to a nonjudicial public sale, the trustee under
the deed of trust must--
- record a notice of default and notice of sale, and
- send a copy of those notices to the borrower and to any other
party who has recorded a request for a copy of them.
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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. Some states require a
reinstatement period during which the borrower or junior lienholder may have the
right to cure the default by paying the entire actual amount in arrears, without
regard to the acceleration of the indebtedness, plus the lender's expenses
incurred in enforcing the obligation. In other states, the borrower or the
junior lienholder has only the right to pay off the entire debt to prevent the
foreclosure sale. Generally, state law governs the procedure for public sale,
the parties entitled to notice, the method of giving notice and the applicable
time periods.
PUBLIC SALE. A third party may be unwilling to purchase a mortgaged
property at a public sale because of--
- the difficulty in determining the exact status of title to the
property due to, among other things, redemption rights that
may exist, and
- the possibility that physical deterioration of the property
may have occurred during the foreclosure proceedings.
As a result of the foregoing, it is common for the lender to
purchase the mortgaged property and become its owner, subject to the borrower's
right in some states to remain in possession during a redemption period. In that
case, the lender will have both the benefits and burdens of ownership, including
the obligation to pay debt service on any senior mortgages, to pay taxes, to
obtain casualty insurance and to make repairs necessary to render the property
suitable for sale. The costs of operating and maintaining a commercial or
multifamily residential property may be significant and may be greater than the
income derived from that property. The lender also will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale or lease of the property. Whether, the ultimate proceeds of the
sale of the property equal the lender's investment in the property depends upon
market conditions. Moreover, because of the expenses associated with acquiring,
owning and selling a mortgaged property, a lender could realize an overall loss
on the related mortgage loan even if the mortgaged property is sold at
foreclosure, or resold after it is acquired through foreclosure, for an amount
equal to the full outstanding principal amount of the loan plus accrued
interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens. In addition, it
may be obliged to keep senior mortgage loans current in order to avoid
foreclosure of its interest in the property. Furthermore, if the foreclosure of
a junior mortgage triggers the enforcement of a due-on-sale clause contained in
a senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
RIGHTS OF REDEMPTION. The purposes of a foreclosure action are--
- to enable the lender to realize upon its security, and
- to bar the borrower, and all persons who have interests in the
property that are subordinate to that of the foreclosing
lender, from exercising their equity of redemption.
The doctrine of equity of redemption provides that, until the property
encumbered by a mortgage has been sold in accordance with a properly conducted
foreclosure and foreclosure sale, those having interests that are subordinate to
that of the foreclosing lender have an equity of redemption and may redeem the
property by paying the entire debt with interest. Those having an equity of
redemption must generally be made parties to the foreclosure proceeding in order
for their equity of redemption to be terminated.
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The equity of redemption is a common-law, nonstatutory right which
should be distinguished from post-sale statutory rights of redemption. In some
states, the borrower and foreclosed junior lienors are given a statutory period
in which to redeem the property after sale under a deed of trust or foreclosure
of a mortgage. In some states, statutory redemption may occur only upon payment
of the foreclosure sale price. In other states, redemption may be permitted if
the former borrower pays only a portion of the sums due. A statutory right of
redemption will diminish the ability of the lender to sell the foreclosed
property because the exercise of a right of redemption would defeat the title of
any purchaser through a foreclosure. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired. In some states, a
post-sale statutory right of redemption may exist following a judicial
foreclosure, but not following a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION. Some or all of the mortgage loans backing
a series of bonds may be nonrecourse loans. Recourse in the case of a default on
a non-recourse mortgage loan will be limited to the mortgaged property and any
other assets that were pledged to secure the mortgage loan. However, even if a
mortgage loan by its terms provides for recourse to the borrower's other assets,
a lender's ability to realize upon those assets may be limited by state law. For
example, in some states, a lender cannot obtain a deficiency judgment against
the borrower following foreclosure or sale under a deed of trust. A deficiency
judgment is a personal judgment against the former borrower equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Other statutes may require the lender
to exhaust the security afforded under a mortgage before bringing a personal
action against the borrower. In some other states, the lender has the option of
bringing a personal action against the borrower on the debt without first
exhausting the security, but in doing so, the lender may be deemed to have
elected a remedy and thus may be precluded from foreclosing upon the security.
Consequently, lenders will usually proceed first against the security in states
where an election of remedy provision exists. Finally, other statutory
provisions limit any deficiency judgment to the excess of the outstanding debt
over the fair market value of the property at the time of the sale. These other
statutory provisions are intended to protect borrowers from exposure to large
deficiency judgments that might result from bidding at below-market values at
the foreclosure sale.
LEASEHOLD CONSIDERATIONS. Some or all of the mortgage loans backing a
series of offered bonds may be secured by a mortgage on the borrower's leasehold
interest under a ground lease. Leasehold mortgage loans are subject to some
risks not associated with mortgage loans secured by a lien on the fee estate of
the borrower. The most significant of these risks is that if the borrower's
leasehold were to be terminated upon a lease default, the leasehold mortgagee
would lose its security. This risk may be lessened if the ground lease:
- requires the lessor to give the leasehold mortgagee notices 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 other protective provisions typically required by
prudent lenders to be included in a ground lease.
Some mortgage loans backing a series of offered bonds, however, may be
secured by ground leases which do not contain these provisions.
COOPERATIVE SHARES. Some or all of the mortgage loans backing a series
of bonds may be secured by a security interest on the borrower's ownership
interest in shares, and the proprietary leases belonging to those shares,
allocable to cooperative dwelling units that may be vacant or occupied by
nonowner tenants. Loans secured in this manner are subject to some risks not
associated with mortgage loans secured by a lien on the fee estate of a borrower
in real property. Loans secured in this manner typically are subordinate to the
mortgage, if any, on the cooperative's building. That mortgage, if foreclosed,
could extinguish the equity in the building and the proprietary leases of the
dwelling units derived from ownership of the shares of the cooperative. Further,
transfer
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of shares in a cooperative is subject to various regulations as well as to
restrictions under the governing documents of the cooperative. The shares may be
canceled in the event that associated maintenance charges due under the related
proprietary leases are not paid. Typically, a recognition agreement between the
lender and the cooperative provides, among other things, that the lender may
cure a default under a proprietary lease.
Under the laws applicable in many states, foreclosure on cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to the shares. Article 9 of the
UCC requires that a sale be conducted in a commercially reasonable manner, which
may be dependent upon, among other things, the notice given the debtor and the
method, manner, time, place and terms of the sale. Article 9 of the UCC provides
that the proceeds of the sale will be applied first to pay the costs and
expenses of the sale and then to satisfy the indebtedness secured by the
lender's security interest. A recognition agreement, however, generally provides
that the lender's right to reimbursement is subject to the right of the
cooperative corporation to receive sums due under the proprietary leases.
BANKRUPTCY LAWS
Operation of the U.S. Bankruptcy Code and related state laws may
interfere with or affect the ability of a lender to realize upon collateral or
to enforce a deficiency judgment. For example, under the U.S. Bankruptcy Code,
virtually all actions, including foreclosure actions and deficiency judgment
proceedings, to collect a debt are automatically stayed upon the filing of the
bankruptcy petition. Often, no interest or principal payments are made during
the course of the bankruptcy case. The delay caused by an automatic stay and its
consequences can be significant. Also, under the U.S. Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lienor may stay
the senior lender from taking action to foreclose out the junior lien.
Under the U.S. Bankruptcy Code, the amount and terms of a mortgage loan
secured by a lien on property of the debtor may be modified provided that
substantive and procedural safeguards protective of the lender are met. A
bankruptcy court may, among other things--
- reduce the secured portion of the outstanding amount of the
loan to the then-current value of the property, thereby
leaving the lender a general unsecured creditor for the
difference between the then-current value of the property and
the outstanding balance of the loan;
- reduce the amount of each scheduled payment, by means of a
reduction in the rate of interest and/or an alteration of the
repayment schedule, with or without affecting the unpaid
principal balance of the loan;
- extend or shorten the term to maturity of the loan;
- permit the bankrupt borrower to cure of the subject loan
default by paying the arrearage over a number of years; or
- permit the bankrupt borrower, through its rehabilitative plan,
to reinstate the loan payment schedule even if the lender has
obtained a final judgment of foreclosure prior to the filing
of the debtor's petition.
Federal bankruptcy law may also interfere with or affect the ability of
a secured lender to enforce the borrower's assignment of rents and leases
related to the mortgaged property. A lender may be stayed from enforcing the
assignment under the U.S. Bankruptcy Code. In addition, the legal proceedings
necessary to resolve the issue could be time-consuming, and result in delays in
the lender's receipt of the rents. However, recent amendments to the U.S.
Bankruptcy Code may minimize the impairment of the lender's ability to enforce
the borrower's assignment of rents and leases. In addition to the inclusion of
hotel revenues within the definition of
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cash collateral as noted above, the amendments provide that a pre-petition
security interest in rents or hotel revenues is designed to overcome those cases
holding that a security interest in rents is unperfected under the laws of some
states until the lender has taken some further action, such as commencing
foreclosure or obtaining a receiver prior to activation of the assignment of
rents.
A borrower's ability to make payment on a mortgage loan may be impaired
by the commencement of a bankruptcy case relating to the tenant under a lease of
the related property. Under the U.S. Bankruptcy Code, the filing of a petition
in bankruptcy by or on behalf of a tenant results in a stay in bankruptcy
against the commencement or continuation of any state court proceeding for--
- past due rent,
- accelerated rent,
- damages, or
- a summary eviction order with respect to a default under the
lease that occurred prior to the filing of the tenant's
bankruptcy petition.
In addition, the U.S. Bankruptcy Code generally provides that
a trustee or debtor-in-possession may, subject to approval of the court:
- assume the lease and either retain it or assign it to a third
party, or
- reject the lease.
If the lease is assumed, the trustee, debtor-in-possession or assignee,
if applicable, must cure any defaults under the lease, compensate the lessor for
its losses and provide the lessor with adequate assurance of future performance.
These remedies may be insufficient, and any assurances provided to the lessor
may be inadequate. If the lease is rejected, the lessor will be treated, except
potentially to the extent of any security deposit, as an unsecured creditor with
respect to its claim for damages for termination of the lease. The U.S.
Bankruptcy Code also limits a lessor's damages for lease rejection to:
- the rent reserved by the lease without regard to acceleration
for the greater of one year, or 15%, not to exceed three
years, of the remaining term of the lease, plus
- unpaid rent to the earlier of the surrender of the property or
the lessee's bankruptcy filing.
ENVIRONMENTAL CONSIDERATIONS
GENERAL. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties that
are or have been used for industrial, manufacturing, military or disposal
activity. Those environmental risks include the possible diminution of the value
of a contaminated property or, as discussed below, potential liability for
clean-up costs or other remedial actions that could exceed the value of the
property or the amount of the lender's loan. In some circumstances, a lender may
decide to abandon a contaminated real property as collateral for its loan rather
than foreclose and risk liability for clean-up costs.
SUPERLIEN LAWS. Under the laws of many states, contamination on a
property may give rise to a lien on the property for clean-up costs. In several
states, that lien has priority over all existing liens, including those of
existing mortgages. In these states, the lien of a mortgage may lose its
priority to that superlien.
CERCLA. The federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, imposes strict liability on present and
past "owners" and "operators" of contaminated real property for the costs of
clean-up. A secured lender may be liable as an "owner" or "operator"
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of a contaminated mortgaged property if agents or employees of the lender have
participated in the management of the property or the operations of the
borrower. Liability may exist even if the lender did not cause or contribute to
the contamination and regardless of whether the lender has actually taken
possession of the contaminated mortgaged property through foreclosure, deed in
lieu of foreclosure or otherwise. Moreover, liability is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Excluded from CERCLA's definition of "owner" or
"operator," however, is a person who, without participating in the management of
the facility, holds indicia of ownership primarily to protect his security
interest. This is the so called "secured creditor exemption."
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 amended, among other things, the provisions of CERCLA with respect to
lender liability and the secured creditor exemption. The Lender Liability Act
offers substantial protection to lenders by defining the activities in which a
lender can engage and still have the benefit of the secured creditor exemption.
In order for a lender to be deemed to have participated in the management of a
mortgaged property, the lender must actually participate in the operational
affairs of the property of the borrower. The Lender Liability Act provides that
"merely having the capacity to influence, or unexercised right to control"
operations does not constitute participation in management. A lender will lose
the protection of the secured creditor exemption only if--
- it exercises decision-making control over a borrower's
environmental compliance and hazardous substance handling and
disposal practices, or
- assumes day-to-day management of operational functions of a
mortgaged property.
The Lender Liability Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed-in-lieu of
foreclosure, provided that the lender seeks to sell that property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
OTHER FEDERAL AND STATE LAWS. Many states have statutes similar to
CERCLA, and not all those statutes provide for a secured creditor exemption. In
addition, under federal law, there is potential liability relating to hazardous
wastes and underground storage tanks under the federal Resource Conservation and
Recovery Act.
Some federal, state and local laws, regulations and ordinances govern
the management, removal, encapsulation or disturbance of asbestos-containing
materials. These laws, as well as common law standards, may impose liability for
releases of or exposure to asbestos-containing materials and may provide for
third parties to seek recovery from owners or operators of real properties for
personal injuries associated with those releases.
Recent federal legislation will require owners of residential housing
constructed prior to 1978 to disclose to potential residents or purchasers any
known lead-based paint hazards and will impose treble damages for any failure to
disclose. In addition, the ingestion of lead-based paint chips or dust particles
by children can result in lead poisoning. If lead-based paint hazards exist at a
property, then the owner of that property may be held liable for injuries and
for the costs of removal or encapsulation of the lead-based paint.
In a few states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. In these cases, a lender that
becomes the owner of a property through foreclosure, deed in lieu of foreclosure
or otherwise, may be required to clean up the contamination before selling or
otherwise transferring the property.
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Beyond statute-based environmental liability, there exist common law
causes of action related to hazardous environmental conditions on a property,
such as actions based on nuisance or on toxic tort resulting in death, personal
injury or damage to property. While it may be more difficult to hold a lender
liable under common law causes of action, unanticipated or uninsured liabilities
of the borrower may jeopardize the borrower's ability to meet its loan
obligations.
Federal, state and local environmental regulatory requirements change
often. It is possible that compliance with a new regulatory requirement could
impose significant compliance costs on a borrower. These costs may jeopardize
the borrower's ability to meet its loan obligations.
ADDITIONAL CONSIDERATIONS. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable, it
can bring an action for contribution against the owner or operator who created
the environmental hazard. However, that individual or entity may be without
substantial assets. Accordingly, it is possible that the costs could become a
liability of the related issuer and/or trust estate and occasion a loss to the
related bondholders.
If the operations on a foreclosed property are subject to environmental
laws and regulations, the lender will be required to operate the property in
accordance with those laws and regulations. This compliance may entail
substantial expense, especially in the case of industrial or manufacturing
properties.
In addition, a lender may be obligated to disclose environmental
conditions on a property to government entities and/or to prospective buyers,
including prospective buyers at a foreclosure sale or following foreclosure.
This disclosure may decrease the amount that prospective buyers are willing to
pay for the affected property, sometimes substantially.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Some or all of the mortgage loans backing a series of offered bonds may
contain due-on-sale and due-on-encumbrance clauses that purport to permit the
lender to accelerate the maturity of the loan if the borrower transfers or
encumbers the a mortgaged property. In recent years, court decisions and
legislative actions placed substantial restrictions on the right of lenders to
enforce these clauses in many states. However, the Garn-St Germain Depository
Institutions Act of 1982 generally preempts state laws that prohibit the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to the limitations prescribed in that
Act and the regulations promulgated thereunder.
JUNIOR LIENS; RIGHTS OF HOLDERS OF SENIOR LIENS
The mortgage collateral for a series of offered bonds may include
mortgage loans secured by junior liens, while the loans secured by the related
senior liens may not be included as part of that mortgage collateral. The
primary risk to holders of mortgage loans secured by junior liens is the
possibility that adequate funds will not be received in connection with a
foreclosure of the related senior liens to satisfy fully both the senior loans
and the junior loan.
In the event that a holder of a senior lien forecloses on a mortgaged
property, the proceeds of the foreclosure or similar sale will be applied as
follows:
- FIRST, to the payment of court costs and fees in connection
with the foreclosure;
- SECOND, to real estate taxes;
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- THIRD, in satisfaction of all principal, interest, prepayment
or acceleration penalties, if any, and any other sums due and
owing to the holder of the senior liens; and
- LAST, in satisfaction of all principal, interest, prepayment
and acceleration penalties, if any, and any other sums due and
owing to the holder of the junior mortgage loan.
SUBORDINATE FINANCING
The terms of some mortgage loans backing a series of offered bonds may
not restrict the ability of the borrower to use the mortgaged property as
security for one or more additional loans, or the restrictions may be
unenforceable. Where a borrower encumbers a mortgaged property with one or more
junior liens, the senior lender is subjected to the following additional risks:
- the borrower may have difficulty servicing and repaying
multiple loans;
- if the subordinate financing permits recourse to the borrower,
as is frequently the case, and the senior loan does not, a
borrower may have more incentive to repay sums due on the
subordinate loan;
- acts of the senior lender that prejudice the junior lender or
impair the junior lender's security, such as the senior
lender's agreeing to an increase in the principal amount of or
the interest rate payable on the senior loan, may create a
superior equity in favor of the junior lender;
- if the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the
senior lender and can interfere with or delay the taking of
action by the senior lender; and
- the bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower
to pay a late charge or additional interest if payments are not timely made.
They may also contain provisions that prohibit prepayments for a specified
period and/or condition prepayments upon the borrower's payment of prepayment
premium, fee or charge. Some states, there are or may be specific limitations
upon the late charges that a lender may collect from a borrower for delinquent
payments. Some states also limit the amounts that a lender may collect from a
borrower as an additional charge if the loan is prepaid. In addition, the
enforceability of provisions that provide for prepayment premiums, fees and
charges upon an involuntary prepayment is unclear under the laws of many states.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that state usury limitations shall not apply to
some types of residential, including multifamily, first mortgage loans
originated by some lenders after March 31, 1980. Title V authorized any state to
reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that expressly rejects application of the federal law.
In addition, even where Title V is not 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. Some states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
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AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of
1990 and rules promulgated thereunder, in order to protect individuals with
disabilities, owners of 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, the altered portions are readily accessible to and usable by
disabled individuals. The "readily achievable" standard takes into account,
among other factors, the financial resources of the affected property owner,
landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the ADA
may also impose requirements on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Furthermore, because the
"readily achievable" standard may vary depending on the financial condition of
the owner or landlord, a foreclosing lender that is financially more capable
than the borrower of complying with the requirements of the ADA may be subject
to more stringent requirements than those to which the borrower is subject.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended, a borrower who enters military service after the
origination of the borrower's mortgage loan, including a borrower who was in
reserve status and is called to active duty after origination of the mortgage
loan, may not be charged interest, including fees and charges, above an annual
rate of 6% during the period of the borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
individuals who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to
individuals who enter military service, including reservists who are called to
active duty, after origination of the related mortgage loan, no information can
be provided as to the number of loans with individuals as borrowers that may be
affected by the Relief Act.
Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of a master servicer or special
servicer to collect full amounts of interest on an affected mortgage loan. Any
shortfalls in interest collections resulting from the application of the Relief
Act would result in a reduction of the amounts payable to the holders of bonds
of the related series, and would not be covered by advances or, unless otherwise
specified in the related prospectus supplement, any form of credit support
provided in connection with the bonds. In addition, the Relief Act imposes
limitations that would impair the ability of a master servicer or special
servicer to foreclose on an affected mortgage loan during the borrower's period
of active duty status and, under some circumstances, during an additional three
month period after the active duty status ceases.
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 statute can be seized by the government if the property
was used in, or purchased with the proceeds of, those crimes. Under procedures
contained in the comprehensive Crime Control Act of 1984, the government may
seize the property even before conviction. The government must publish notice of
the forfeiture proceeding and 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--
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- its mortgage was executed and recorded before
commission of the crime upon which the forfeiture is
based, or
- 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
GENERAL
This is a general discussion of the material federal income
tax consequences of owning the offered bonds. This discussion is directed to
bondholders that hold the offered bonds as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986. It does not discuss all
federal income tax consequences that may be relevant to owners of offered bonds,
particularly as to investors subject to special treatment under the Internal
Revenue Code, including:
- banks,
- insurance companies, and
- foreign investors.
Further, this discussion and any legal opinions referred to in
this discussion are based on authorities that can change, or be differently
interpreted, with possible retroactive effect. No rulings have been or will be
sought from the IRS with respect to any of the federal income tax consequences
discussed below. Accordingly, the IRS may take contrary positions.
Investors and preparers of tax returns should be aware that
under applicable Treasury regulations a provider of advice on specific issues of
law is not considered an income tax return preparer unless the advice is--
- given with respect to events that have occurred at
the time the advice is rendered, and
- is directly relevant to the determination of an entry
on a tax return.
Accordingly, even if this discussion addresses an issue regarding the tax
treatment of the owner of the offered bonds, investors should consult their own
tax advisors regarding that issue. Investors should do so not only as to federal
taxes, but also state and local taxes. See "State and Other Tax Consequences."
The following discussion addresses securities of three general
types:
- REMIC bonds that are or represent regular interests
or residual interests in a real estate mortgage
investment conduit, or REMIC, within the meaning of
Section 860D of the Code;
- FASIT bonds that are or represent regular interests
in a financial asset securitization investment trust,
or FASIT, within the meaning of Section 860L(a) of
the Code; and
- bonds as to which no REMIC or FASIT election is made
and that are characterized as indebtedness of, or a
notional principal contract issued by, the related
issuer for federal income tax purposes.
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We will indicate in the prospectus supplement for each series
of offered bonds whether the related bond trustee, another party to the related
Governing Documents or an agent appointed by that trustee or other party will
act as tax administrator for the related trust estate. If the related tax
administrator is required to make a REMIC or FASIT election, we also will
identify in the related prospectus supplement all regular interests, residual
interests and/or ownership interests, as applicable, in the resulting REMIC or
FASIT.
The following discussion is limited to bonds offered under
this prospectus. In addition, this discussion applies only to the extent that
the related trust estate consists only of mortgage loans. If a trust estate
includes assets other than mortgage loans, such as mortgage-backed securities,
we will disclose in the related prospectus supplement the tax consequences
associated with those other assets being included. In addition, if agreements
other than guaranteed investment contracts are included as part of a trust
estate to provide interest rate protection for the related offered bonds, the
anticipated material tax consequences associated with those agreements also will
be discussed in the related prospectus supplement. See "Description of the Trust
Estates--Arrangements Providing Reinvestment, Interest Rate and Currency Related
Protection."
The following discussion is based in part on the rules
governing original issue discount in Sections 1271-1273 and 1275 of the Internal
Revenue Code and in the Treasury regulations issued under those sections. It is
also based in part on the rules governing REMICs in Sections 860A-860G of the
Internal Revenue Code and in the Treasury regulations issued under those
sections. The regulations relating to original issue discount do not adequately
address all issues relevant to, and in some instances provide that they are not
applicable to, securities such as the offered bonds.
REMICS
GENERAL. With respect to each series of offered bonds as to
which the related tax administrator will make a REMIC election, our counsel will
deliver its opinion generally to the effect that, assuming compliance with all
provisions of the related Governing Documents, and subject any other assumptions
set forth in the opinion:
- the related trust estate, or the relevant designated
portion of the trust estate, will qualify as a REMIC,
and
- those offered bonds will represent--
1. regular interests in the REMIC, or
2. residual interests in the REMIC.
Any and all offered bonds representing interests in a REMIC
will be either
- REMIC regular bonds, representing regular interests
in the REMIC, or
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- REMIC residual bonds, representing residual interests
in the REMIC.
If an entity electing to be treated as a REMIC fails to comply
with the ongoing requirements of the Internal Revenue Code for REMIC status, it
may lose its REMIC status. If so, the entity may become taxable as a
corporation. Therefore, the related bonds may not be given the tax treatment
summarized below. Although the Internal Revenue Code authorizes the Treasury
Department to issue regulations providing relief in the event of an inadvertent
termination of REMIC status, the Treasury Department has not done so. Any relief
mentioned above, moreover, may be accompanied by sanctions. These sanctions
could include the imposition of a corporate tax on all or a portion of a trust
estate's income for the period in which the requirements for REMIC status are
not satisfied. The Governing Documents with respect to each REMIC will include
provisions designed to maintain its status as a REMIC under the Internal Revenue
Code.
CHARACTERIZATION OF INVESTMENTS IN REMIC BONDS. Unless we
state otherwise in the related prospectus supplement, the offered bonds that are
REMIC bonds will be treated as--
- "real estate assets" within the meaning of Section
856(c)(5)(B) of the Internal Revenue Code in the
hands of a real estate investment trust, and
- "loans secured by an interest in real property" or
other assets described in Section 7701(a)(19)(C) of
the Internal Revenue Code in the hands of a thrift
institution,
in the same proportion that the assets of the related REMIC are so treated.
However, to the extent that the REMIC assets constitute
mortgage loans on property not used for residential or some other prescribed
purposes, the related offered bonds will not be treated as assets qualifying
under Section 7701(a)(19)(C). If 95% or more of the assets of the REMIC qualify
for any of the foregoing characterizations at all times during a calendar year,
the related offered bonds will qualify for the corresponding status in their
entirety for that calendar year.
In addition, offered bonds that are REMIC regular bonds will
be:
- "qualified mortgages" within the meaning of Section
860G(a)(3) of the Internal Revenue Code in the hands
of another REMIC; and
- "permitted assets" under Section 860L(c)(1)(G) for a
FASIT.
Finally, interest, including original issue discount, on
offered bonds that are REMIC regular bonds, and income allocated to offered
bonds that are REMIC residual bonds, will be interest described in Section
856(c)(3)(B) of the Internal Revenue Code if received by a real estate
investment trust, to the extent that these bonds are treated as "real estate
assets" within the meaning of Section 856(c)(5)(B) of the Internal Revenue Code.
The related tax administrator will determine the percentage of
the REMIC's assets that constitute assets described in the above-referenced
sections of the Internal Revenue Code with respect to each calendar quarter
based on the average adjusted basis of each category of the assets held by the
REMIC during that calendar quarter. The related tax administrator will report
those determinations to bondholders in the manner and at the times required by
applicable Treasury regulations.
The assets of the REMIC will include, in addition to mortgage
loans--
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- collections on mortgage loans held pending payment on
the related offered bonds, and
- any property acquired by foreclosure held pending
sale, and may include amounts in reserve accounts.
It is unclear whether property acquired by foreclosure held
pending sale, and amounts in reserve accounts, would be considered to be part of
the mortgage loans, or whether these assets otherwise would receive the same
treatment as the mortgage loans for purposes of the above-referenced sections of
the Internal Revenue Code. In addition, in some instances, the mortgage loans
may not be treated entirely as assets described in those sections of the
Internal Revenue Code. If so, we will describe in the related prospectus
supplement those mortgage loans that are characterized differently. The Treasury
regulations do provide, however, that cash received from collections on mortgage
loans held pending payment is considered part of the mortgage loans for purposes
of Section 856(c)(5)(B) of the Internal Revenue Code, relating to real estate
investment trusts.
To the extent a REMIC bond is backed by a mortgage loan that
is secured in part by the related borrower's interest in a bank account, that
mortgage loan is not secured solely by real estate. Accordingly:
- a portion of that bond may not represent ownership of
"loans secured by an interest in real property" or
other assets described in Section 7701(a)(19)(C) of
the Internal Revenue Code;
- a portion of that bond may not represent ownership of
"real estate assets" under Section 856(c)(5)(B) of
the Internal Revenue Code; and
- the interest on that bond may not constitute
"interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B)
of the Internal Revenue Code.
TIERED REMIC STRUCTURES. For some series of REMIC bonds, the
related tax administrator may make two or more REMIC elections as to the related
trust estate for federal income tax purposes. As to each of these series of
REMIC bonds, our counsel will opine that each portion of the related trust
estate as to which a REMIC election is to be made will qualify as a REMIC. Each
of these series will be treated as one REMIC solely for purposes of determining:
- whether the related REMIC bonds will be "real estate
assets" within the meaning of Section 856(c)(5)(B) of
the Internal Revenue Code,
- whether the related REMIC bonds will be "loans
secured by an interest in real property" under
Section 7701(a)(19)(C) of the Internal Revenue Code,
and
- whether the interest/income on the related REMIC
bonds is interest described in Section 856(c)(3)(B)
of the Internal Revenue Code.
TAXATION OF OWNERS OF REMIC REGULAR BONDS.
GENERAL. Except as otherwise stated in this discussion, the
Internal Revenue Code treats REMIC regular bonds as debt instruments issued by
the REMIC and not as ownership interests in the REMIC or its assets. Holders of
REMIC regular bonds that otherwise report income under the cash method of
accounting must nevertheless report income with respect to REMIC regular bonds
under the accrual method.
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ORIGINAL ISSUE DISCOUNT. Some REMIC regular bonds may be
issued with original issue discount within the meaning of Section 1273(a) of the
Internal Revenue Code. Any holders of REMIC regular bonds issued with original
issue discount generally will have to include original issue discount in income
as it accrues, in accordance with a constant yield method, prior to the receipt
of the cash attributable to that income. The IRS has issued regulations under
Sections 1271 to 1275 of the Internal Revenue Code generally addressing the
treatment of debt instruments issued with original issue discount. Section
1272(a)(6) of the Internal Revenue Code provides special rules applicable to the
accrual of original issue discount on, among other things, REMIC regular bonds.
The Treasury Department has not issued regulations under that section. You
should be aware, however, that Section 1272(a)(6) and the regulations under
Sections 1271 to 1275 of the Internal Revenue Code do not adequately address
some issues relevant to, or are not applicable to, prepayable securities such as
the offered bonds. We recommend that you consult your own tax advisor concerning
the tax treatment of your offered bonds.
The Internal Revenue Code requires, in computing the accrual
of original issue discount on REMIC regular bonds, that a reasonable assumption
be used concerning the rate at which borrowers will prepay the mortgage loans
held by the related REMIC. Further, adjustments must be made in the accrual of
that original issue discount to reflect differences between the prepayment rate
actually experienced and the assumed prepayment rate. The prepayment assumption
is to be determined in a manner prescribed in Treasury regulations that the
Treasury Department has not yet issued. The Committee Report indicates that the
regulations should provide that the prepayment assumption used with respect to a
REMIC regular bond is determined once, at initial issuance, and must be the same
as that used in pricing. The prepayment assumption used in reporting original
issue discount for each series of REMIC regular bonds will be consistent with
this standard and will be disclosed in the related prospectus supplement.
However, neither we nor any other person will make any representation that the
mortgage loans backing any series of REMIC regular bonds will in fact prepay at
a rate conforming to the prepayment assumption or at any other rate or that the
IRS will not challenge on audit the prepayment assumption used.
The original issue discount, if any, on a REMIC regular bond
will be the excess of its stated redemption price at maturity over its issue
price.
The issue price of a particular class of REMIC regular bonds
will be the first cash price at which a substantial amount of those bonds are
sold, excluding sales to bond houses, brokers and underwriters. If less than a
substantial amount of a particular class of REMIC regular bonds is sold for cash
on or prior to the related date of initial issuance of those bonds, the issue
price for that class will be the fair market value of that class on the date of
initial issuance.
Under the Treasury regulations, the stated redemption price of
a REMIC regular bond is equal to the total of all payments to be made on that
bond other than qualified stated interest. Qualified stated interest is interest
that is unconditionally payable at least annually, during the entire term of the
instrument, at:
- a single fixed rate,
- a "qualified floating rate,"
- an "objective rate,"
- a combination of a single fixed rate and one or more
"qualified floating rates,"
- a combination of a single fixed rate and one
"qualified inverse floating rate," or
- a combination of "qualified floating rates" that does
not operate in a manner that accelerates or defers
interest payments on the REMIC regular bond.
In the case of REMIC regular bonds bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion of original issue discount will vary
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according to the characteristics of those bonds. If the original issue discount
rules apply to those bonds, we will describe in the related prospectus
supplement the manner in which those rules will be applied with respect to those
bonds in preparing information returns to the bondholders and the IRS.
Some classes of REMIC regular bonds may provide that the first
interest payment with respect to those bonds be made more than one month after
the date of initial issuance, a period that is longer than the subsequent
monthly intervals between interest payments. Assuming the accrual period for
original issue discount is the monthly period that ends on each payment date,
then, as a result of this long first accrual period, some or all interest
payments may be required to be included in the stated redemption price of the
REMIC regular bond and accounted for as original issue discount. Because
interest on REMIC regular bonds must in any event be accounted for under an
accrual method, applying this analysis would result in only a slight difference
in the timing of the inclusion in income of the yield on the REMIC regular
bonds.
In addition, if the accrued interest to be paid on the first
payment date is computed with respect to a period that begins prior to the date
of initial issuance, a portion of the purchase price paid for a REMIC regular
bond will reflect that accrued interest. In those cases, information returns
provided to the bondholders and the IRS will be based on the position that the
portion of the purchase price paid for the interest accrued prior to the date of
initial issuance is treated as part of the overall cost of the REMIC regular
bond. Therefore, the portion of the interest paid on the first payment date in
excess of interest accrued from the date of initial issuance to the first
payment date is included in the stated redemption price of the REMIC regular
bond. However, the Treasury regulations state that all or some portion of this
accrued interest may be treated as a separate asset, the cost of which is
recovered entirely out of interest paid on the first payment date. It is unclear
how an election to do so would be made under these regulations and whether this
election could be made unilaterally by a bondholder.
Notwithstanding the general definition of original issue
discount, original issue discount on a REMIC regular bond will be considered to
be DE MINIMIS if it is less than 0.25% of the stated redemption price of the
bond multiplied by its weighted average maturity. For this purpose, the weighted
average maturity of a REMIC regular bond is computed as the sum of the amounts
determined, as to each payment included in the stated redemption price of the
bond, by multiplying:
- the number of complete years, rounding down for
partial years, from the date of initial issuance,
until that payment is expected to be made, presumably
taking into account the prepayment assumption, by
- a fraction--
1. the numerator of which is the amount of the
payment, and
2. the denominator of which is the stated
redemption price at maturity of the bond.
Under the Treasury regulations, original issue discount of
only a DE MINIMIS amount, other than DE MINIMIS original issue discount
attributable to a so-called teaser interest rate or an initial interest holiday,
will be included in income as each payment of stated principal is made, based on
the product of:
- the total amount of the DE MINIMIS original issue
discount, and
- a fraction--
1. the numerator of which is the amount of the
principal payment, and
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2. the denominator of which is the outstanding
stated principal amount of the subject REMIC
regular bond.
The Treasury regulations also would permit you to elect to
accrue DE MINIMIS original issue discount into income currently based on a
constant yield method. See "--REMICs--Taxation of Owners of REMIC Regular
Bonds--Market Discount" below for a description of that election under the
applicable Treasury regulations.
If original issue discount on a REMIC regular bond is in
excess of a DE MINIMIS amount, the holder of the bond must include in ordinary
gross income the sum of the daily portions of original issue discount for each
day during its taxable year on which it held the bond, including the purchase
date but excluding the disposition date. In the case of an original holder of a
REMIC regular bond, the daily portions of original issue discount will be
determined as described below in this "--Original Issue Discount" subsection.
As to each accrual period, the related tax administrator will
calculate the original issue discount that accrued during that accrual period.
For these purposes, an accrual period is, unless we otherwise state in the
related prospectus supplement, the period that begins on a date that corresponds
to a payment date, or in the case of the first accrual period, begins on the
date of initial issuance, and ends on the day preceding the immediately
following payment date. The portion of original issue discount that accrues in
any accrual period will equal the excess, if any, of:
- the sum of--
1. the present value, as of the end of the
accrual period, of all of the payments
remaining to be made on the subject REMIC
regular bond, if any, in future periods,
presumably taking into account the
prepayment assumption, and
2. the payments made on that bond during the
accrual period of amounts included in the
stated redemption price, over
- the adjusted issue price of the subject REMIC regular
bond at the beginning of the accrual period.
The adjusted issue price of a REMIC regular bond is:
- the issue price of the bond, increased by
- the total amount of original issue discount
previously accrued on the bond, reduced by
- the amount of all prior payments of amounts included
in its stated redemption price.
The present value of the remaining payments referred to in item 1. of the second
preceding sentence, will be calculated:
- assuming that payments on the REMIC regular bond will
be received in future periods based on the related
mortgage loans being prepaid at a rate equal to the
prepayment assumption;
- using a discount rate equal to the original yield to
maturity of the bond, based on its issue price and
the assumption that the related mortgage loans will
be prepaid at a rate equal to the prepayment
assumption; and
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- taking into account events, including actual
prepayments, that have occurred before the close of
the accrual period.
The original issue discount accruing during any accrual
period, computed as described above in this "--Original Issue Discount"
subsection, will be allocated ratably to each day during the accrual period to
determine the daily portion of original issue discount for that day.
A subsequent purchaser of a REMIC regular bond that purchases
the bond at a cost, excluding any portion of that cost attributable to accrued
qualified stated interest, that is less than its remaining stated redemption
price, will also be required to include in gross income the daily portions of
any original issue discount with respect to the bond. However, the daily portion
will be reduced, if the cost is in excess of its adjusted issue price, in
proportion to the ratio that the excess bears to the total original issue
discount remaining to be accrued on the bond. The adjusted issue price of a
REMIC regular bond, as of any date of determination, equals the sum of:
- the adjusted issue price or, in the case of the first
accrual period, the issue price, of the bond at the
beginning of the accrual period which includes that
date of determination, and
- the daily portions of original issue discount for all
days during that accrual period prior to that date of
determination.
If the foregoing method for computing original issue discount
results in a negative amount of original issue discount as to any accrual period
with respect to a REMIC regular bond held by you, the amount of original issue
discount accrued for that accrual period will be zero. You may not deduct the
negative amount currently. Instead, you will only be permitted to offset it
against future positive original issue discount, if any, attributable to the
bond. Although not free from doubt, it is possible that you may be permitted to
recognize a loss to the extent your basis in the bond exceeds the maximum amount
of payments that you could ever receive with respect to the bond. However, the
loss may be a capital loss, which is limited in its deductibility. The foregoing
considerations are particularly relevant to bonds that have no, or a
disproportionately small, amount of principal because they can have negative
yields if the mortgage loans held by the related REMIC prepay more quickly than
anticipated. See "Risk Factors--The Investment Performance of Your Offered Bonds
Will Depend Upon Payments, Defaults and Losses on the Underlying Mortgage
Loans."
The Treasury regulations in some circumstances permit the
holder of a debt instrument to recognize original issue discount under a method
that differs from that used by the issuer. Accordingly, it is possible that you
may be able to select a method for recognizing original issue discount that
differs from that used by the trust in preparing reports to you and the IRS.
Prospective purchasers of the REMIC regular bonds should consult their tax
advisors concerning the tax treatment of these bonds in this regard.
MARKET DISCOUNT. You will be considered to have purchased a
REMIC regular bond at a market discount if--
- in the case of a bond issued without original issue
discount, you purchased the bond at a price less than
its remaining stated principal amount, or
- in the case of a bond issued with original issue
discount, you purchased the bond at a price less than
its adjusted issue price.
If you purchase a REMIC regular bond with more than a DE
MINIMIS amount of market discount, you will recognize gain upon receipt of each
payment representing stated redemption price. Under Section 1276 of
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the Internal Revenue Code, you generally will be required to allocate the
portion of each payment representing some or all of the stated redemption price
first to accrued market discount not previously included in income. You must
recognize ordinary income to that extent. You may elect to include market
discount in income currently as it accrues rather than including it on a
deferred basis in accordance with the foregoing. If made, this election will
apply to all market discount bonds acquired by you on or after the first day of
the first taxable year to which this election applies.
The Treasury regulations also permit you to elect to accrue
all interest and discount, including DE MINIMIS market or original issue
discount, in income as interest, and to amortize premium, based on a constant
yield method. Your making this election with respect to a REMIC regular bond
with market discount would be deemed to be an election to include currently
market discount in income with respect to all other debt instruments with market
discount that you acquire during the taxable year of the election or thereafter,
and possibly previously acquired instruments. Similarly, your making this
election as to a bond acquired at a premium would be deemed to be an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that you own or acquire. See "--REMICs--Taxation of Owners of REMIC
Regular Bonds--Premium" below.
Each of the elections described above to accrue interest and
discount, and to amortize premium, with respect to a bond on a constant yield
method or as interest would be irrevocable except with the approval of the IRS.
However, market discount with respect to a REMIC regular bond
will be considered to be DE MINIMIS for purposes of Section 1276 of the Internal
Revenue Code if the market discount is less than 0.25% of the remaining stated
redemption price of the bond multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the Treasury regulations refer to the weighted average maturity of
obligations. It is likely that the same rule will be applied with respect to
market discount, presumably taking into account the prepayment assumption. If
market discount is treated as DE MINIMIS under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a DE MINIMIS amount. See "--REMICs--Taxation of Owners of REMIC Regular
Bonds--Original Issue Discount" above. This treatment would result in discount
being included in income at a slower rate than discount would be required to be
included in income using the method described above.
Section 1276(b)(3) of the Internal Revenue Code specifically
authorizes the Treasury Department to issue regulations providing for the method
for accruing market discount on debt instruments, the principal of which is
payable in more than one installment. Until regulations are issued by the
Treasury Department, the relevant rules described in the Committee Report apply.
The Committee Report indicates that in each accrual period, you may accrue
market discount on a REMIC regular bond held by you, at your option:
- on the basis of a constant yield method,
- in the case of a bond issued without original issue
discount, in an amount that bears the same ratio to
the total remaining market discount as the stated
interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid
on the bond as of the beginning of the accrual
period, or
- in the case of a bond issued with original issue
discount, in an amount that bears the same ratio to
the total remaining market discount as the original
issue discount accrued in the accrual period bears to
the total amount of original issue discount remaining
on the bond at the beginning of the accrual period.
The prepayment assumption used in calculating the accrual of
original issue discount is also used in calculating the accrual of market
discount.
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To the extent that REMIC regular bonds provide for monthly or
other periodic payments throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which the discount would accrue if it were
original issue discount. Moreover, in any event a holder of a REMIC regular bond
generally will be required to treat a portion of any gain on the sale or
exchange of the bond as ordinary income to the extent of the market discount
accrued to the date of disposition under one of the foregoing methods, less any
accrued market discount previously reported as ordinary income.
Further, Section 1277 of the Internal Revenue Code may require
you to defer a portion of your interest deductions for the taxable year
attributable to any indebtedness incurred or continued to purchase or carry a
REMIC regular bond purchased with market discount. For these purposes, the DE
MINIMIS rule referred to above applies. Any deferred interest expense would not
exceed the market discount that accrues during the related taxable year and is,
in general, allowed as a deduction not later than the year in which the related
market discount is includible in income. If you have elected, however, to
include market discount in income currently as it accrues, the interest deferral
rule described above would not apply.
PREMIUM. A REMIC regular bond purchased at a cost, excluding
any portion of the cost attributable to accrued qualified stated interest, that
is greater than its remaining stated redemption price will be considered to be
purchased at a premium. You may elect under Section 171 of the Internal Revenue
Code to amortize the premium under the constant yield method over the life of
the bond. If you elect to amortize bond premium, bond premium would be amortized
on a constant yield method and would be applied as an offset against qualified
stated interest. If made, this election will apply to all debt instruments
having amortizable bond premium that you own or subsequently acquire. The IRS
has issued regulations on the amortization of bond premium, but they
specifically do not apply to holders of REMIC regular bonds.
The Treasury regulations also permit you to elect to include
all interest, discount and premium in income based on a constant yield method,
further treating you as having made the election to amortize premium generally.
See "--Taxation of Owners of REMIC Regular Bonds--Market Discount" above. The
Committee Report states that the same rules that apply to accrual of market
discount and require the use of a prepayment assumption in accruing market
discount with respect to REMIC regular bonds without regard to whether those
bonds have original issue discount, will also apply in amortizing bond premium
under Section 171 of the Internal Revenue Code.
Whether you will be treated as holding a REMIC regular bond
with amortizable bond premium will depend on--
- the purchase price paid for your offered bond, and
- the payments remaining to be made on your offered
bond at the time of its acquisition by you.
If you acquire an interest in any class of REMIC regular bonds issued at a
premium, you should consider consulting your own tax advisor regarding the
possibility of making an election to amortize the premium.
REALIZED LOSSES. Under Section 166 of the Internal Revenue
Code, if you are either a corporate holder of a REMIC regular bond and or a
noncorporate holder of a REMIC regular bond that acquires the bond in connection
with a trade or business, you should be allowed to deduct, as ordinary losses,
any losses sustained during a taxable year in which your offered bond becomes
wholly or partially worthless as the result of one or more realized losses on
the related mortgage loans. However, if you are a noncorporate holder that does
not acquire a REMIC regular bond in connection with a trade or business, it
appears that--
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- you will not be entitled to deduct a loss under
Section 166 of the Internal Revenue Code until your
offered bond becomes wholly worthless, which is when
its principal balance has been reduced to zero, and
- the loss will be characterized as a short-term
capital loss.
You will also have to accrue interest and original issue
discount with respect to your REMIC regular bond, without giving effect to any
reductions in payments attributable to defaults or delinquencies on the related
mortgage loans, until it can be established that those payment reductions are
not recoverable. As a result, your taxable income in a period could exceed your
economic income in that period. If any of those amounts previously included in
taxable income are not ultimately received due to a loss on the related mortgage
loans, you should be able to recognize a loss or reduction in income. However,
the law is unclear with respect to the timing and character of this loss or
reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL BONDS.
GENERAL. Although a REMIC is a separate entity for federal
income tax purposes, the Internal Revenue Code does not subject a REMIC to
entity-level taxation, except with regard to prohibited transactions and the
other transactions described under "--REMICs--Prohibited Transactions Tax and
Other Taxes" below. Rather, a holder of REMIC residual bonds must generally take
in income the taxable income or net loss of the related REMIC. Accordingly, the
Internal Revenue Code treats the REMIC residual bonds much differently than it
would if they were direct ownership interests in the related mortgage loans or
as debt instruments issued by the related REMIC.
Holders of REMIC residual bonds generally will be required to
report their daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the related REMIC for each day during
a calendar quarter that they own those bonds. For this purpose, the taxable
income or net loss of the REMIC will be allocated to each day in the calendar
quarter ratably using a "30 days per month/90 days per quarter/360 days per
year" convention unless we otherwise disclose in the related prospectus
supplement. These daily amounts then will be allocated among the holders of the
REMIC residual bonds in proportion to their respective ownership interests on
that day. Any amount included in the bondholders' gross income or allowed as a
loss to them by virtue of this paragraph will be treated as ordinary income or
loss. The taxable income of the REMIC will be determined under the rules
described below in "--REMICs--Taxation of Owners of REMIC Residual
Bonds--Taxable Income of the REMIC." Holders of REMIC residual bonds must report
the taxable income of the related REMIC without regard to the timing or amount
of cash payments by the REMIC until the REMIC's termination. Income derived from
REMIC residual bonds will be "portfolio income" for purposes of the limitations
under Section 469 of the Internal Revenue Code on the deductibility of "passive
losses."
A holder of a REMIC residual bond that purchased the bond from
a prior holder also will be required to report on its federal income tax return
amounts representing its daily share of the taxable income, or net loss, of the
related REMIC for each day that it holds the REMIC residual bond. These daily
amounts generally will equal the amounts of taxable income or net loss
determined as described above. The Committee Report indicates that modifications
of the general rules may be made, by regulations, legislation or otherwise to
reduce, or increase, the income of a holder of a REMIC residual bond. These
modifications would occur when a holder purchases the REMIC residual bond from a
prior holder at a price other than the adjusted basis that the REMIC residual
bond would have had in the hands of an original holder of that bond. The
Treasury regulations, however, do not provide for these modifications.
Any payments that you receive from the seller of a REMIC
residual bond in connection with the acquisition of that bond will be income to
you. Although it is possible that these payments would be includible in income
immediately upon receipt, the IRS might assert that you should include these
payments in income over time
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according to an amortization schedule or according to some other method. Because
of the uncertainty concerning the treatment of these payments, we recommend that
you consult your tax advisor concerning the treatment of these payments for
income tax purposes.
Tax liability with respect to the amount of income that
holders of REMIC residual bonds will be required to report, will often exceed
the amount of cash payments received from the related REMIC for the
corresponding period. Consequently, you should have--
- other sources of funds sufficient to pay any federal
income taxes due as a result of your ownership of
REMIC residual bonds, or
- unrelated deductions against which income may be
offset.
See, however, the rules discussed below relating to:
- excess inclusions,
- residual interests without significant value, and
- noneconomic residual interests.
The fact that the tax liability associated with this income allocated to you may
exceed the cash payments received by you for the corresponding period may
significantly and adversely affect their after-tax rate of return. This
disparity between income and payments may not be offset by corresponding losses
or reductions of income attributable to your REMIC residual bonds until
subsequent tax years. Even then, the extra income may not be completely offset
due to changes in the Internal Revenue Code, tax rates or character of the
income or loss. Therefore, REMIC residual bonds will ordinarily have a negative
value at the time of issuance. See "Risk Factors--`Residual Interests' in a
`Real Estate Mortgage Investment Conduit' Have Adverse Tax Consequences."
TAXABLE INCOME OF THE REMIC. The taxable income of a REMIC
will equal:
- the income from the mortgage loans and other assets
of the REMIC; plus
- any cancellation of indebtedness income due to the
allocation of realized losses to those REMIC bonds
constituting regular interests in the REMIC; less
- the following items--
1. the deductions allowed to the REMIC for
interest, including original issue discount
but reduced by any premium on issuance, on
any class of REMIC bonds constituting
regular interests in the REMIC, whether
offered or not,
2. amortization of any premium on the mortgage
loans held by the REMIC,
3. bad debt losses with respect to the mortgage
loans held by the REMIC, and
4. except as described below in this "--Taxable
Income of the REMIC" subsection, servicing,
administrative and other expenses.
For purposes of determining its taxable income, a REMIC will
have an initial total basis in its assets equal to the sum of the issue prices
of all REMIC bonds, or in the case of REMIC bonds not sold initially, their fair
market values. The total basis will be allocated among the mortgage loans and
the
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other assets of the REMIC in proportion to their respective fair market values.
The issue price of any REMIC bonds offered hereby will be determined in the
manner described above under "--REMICs--Taxation of Owners of REMIC Regular
Bonds--Original Issue Discount." The issue price of a REMIC bond received in
exchange for an interest in mortgage loans or other property will equal the fair
market value of the interests in the mortgage loans or other property.
Accordingly, if one or more classes of REMIC bonds are retained initially rather
than sold, the related tax administrator may be required to estimate the fair
market value of these interests in order to determine the basis of the REMIC in
the mortgage loans and other property held by the REMIC.
Subject to possible application of the DE MINIMIS rules, the
method of accrual by a REMIC of original issue discount income and market
discount income with respect to mortgage loans that it holds will be equivalent
to the method for accruing original issue discount income for holders of REMIC
regular bonds. That method is a constant yield method taking into account the
prepayment assumption. However, a REMIC that acquires loans at a market discount
must include that market discount in income currently, as it accrues, on a
constant yield basis. See "--REMICs--Taxation of Owners of REMIC Regular Bonds"
above, which describes a method for accruing the discount income that is
analogous to that required to be used by a REMIC as to mortgage loans with
market discount that it holds.
A REMIC will acquire a mortgage loan with discount, or
premium, to the extent that the REMIC's basis determined as described in the
preceding paragraph, is different from its stated redemption price. Discount
will be includible in the income of the REMIC as it accrues, in advance of
receipt of the cash attributable to that income, under a method similar to the
method described above for accruing original issue discount on the REMIC regular
bonds. A REMIC probably will elect under Section 171 of the Internal Revenue
Code to amortize any premium on the mortgage loans that it holds. Premium on any
mortgage loan to which this election applies may be amortized under a constant
yield method, presumably taking into account the prepayment assumption.
A REMIC will be allowed deductions for interest, including
original issue discount, on all of the bonds that constitute regular interests
in the REMIC, whether or not offered hereby, as if those bonds were indebtedness
of the REMIC. Original issue discount will be considered to accrue for this
purpose as described above under "--REMICs--Taxation of Owners of REMIC Regular
Bonds--Original Issue Discount." However, tHE DE MINImis rule, described in that
section will not apply in determining deductions.
If a class of REMIC regular bonds is issued at a price in
excess of the stated redemption price of that class, the net amount of interest
deductions that are allowed to the REMIC in each taxable year with respect to
those bonds will be reduced by an amount equal to the portion of that excess
that is considered to be amortized in that year. It appears that this excess
should be amortized under a constant yield method in a manner analogous to the
method of accruing original issue discount described above under
"--REMICs--Taxation of Owners of REMIC Regular Bonds--Original Issue Discount."
As a general rule, the taxable income of a REMIC will be
determined as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--REMICs--Prohibited Transactions Tax and Other Taxes"
below. Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Internal Revenue Code will not be applied at
the REMIC level so that the REMIC will be allowed full deductions for servicing,
administrative and other noninterest expenses in determining its taxable income.
All those expenses will be allocated as a separate item to the holders of the
related REMIC bonds, subject to the limitation of Section 67 of the Internal
Revenue Code. See "--REMICs--Taxation of Owners of REMIC Residual
Bonds--Possible Pass-Through of Miscellaneous Itemized Deductions" below. If the
deductions allowed to the REMIC exceed its gross income for a calendar quarter,
the excess will be the net loss for the REMIC for that calendar quarter.
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BASIS RULES, NET LOSSES AND PAYMENTS. The adjusted basis of a
REMIC residual bond will be equal to:
- the amount paid for that REMIC residual bond,
- increased by, amounts included in the income of the
holder of that REMIC residual bond, and
- decreased, but not below zero, by payments made, and
by net losses allocated, to the holder of that REMIC
residual bond.
A holder of a REMIC residual bond is not allowed to take into
account any net loss for any calendar quarter to the extent that the net loss
exceeds the adjusted basis to that holder as of the close of that calendar
quarter, determined without regard to that net loss. Any loss that is not
currently deductible by reason of this limitation may be carried forward
indefinitely to future calendar quarters and, subject to the same limitation,
may be used only to offset income from the REMIC residual bond.
Any payment on a REMIC residual bond will be treated as a
nontaxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC residual bond. To the extent a payment on a REMIC
residual bond exceeds the holder's adjusted basis, it will be treated as gain
from the sale of that REMIC residual bond.
A holder's basis in a REMIC residual bond will initially equal
the amount paid for the bond and will be increased by that holder's allocable
share of taxable income of the related REMIC. However, these increases in basis
may not occur until the end of the calendar quarter, or perhaps the end of the
calendar year, with respect to which the related REMIC's taxable income is
allocated to that holder. To the extent the initial basis of the holder of a
REMIC residual bond is less than the payments to that holder, and increases in
the initial basis either occur after these payments or, together with the
initial basis, are less than the amount of these payments, gain will be
recognized to that holder on these payments. This gain will be treated as gain
from the sale of its REMIC residual bond.
The effect of these rules is that a holder of a REMIC residual
bond may not amortize its basis in a REMIC residual bond, but may only recover
its basis:
- through payments,
- through the deduction of any net losses of the REMIC,
or
- upon the sale of its REMIC residual bond.
See "--REMICs--Sales of REMIC Bonds" below.
For a discussion of possible modifications of these rules that
may require adjustments to income of a holder of a REMIC residual bond other
than an original holder, see "--REMICs--Taxation of Owners of REMIC Residual
Bonds--General" above. These adjustments could require a holder of a REMIC
residual bond to account for any difference between the cost of the bond to the
holder and the adjusted basis of the bond would have been in the hands of an
original holder.
EXCESS INCLUSIONS. Any excess inclusions with respect to a
REMIC residual bond will be subject to federal income tax in all events. In
general, the excess inclusions with respect to a REMIC residual bond for any
calendar quarter will be the excess, if any, of:
- the daily portions of REMIC taxable income allocable
to that bond, over
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- the sum of the daily accruals for each day during the
quarter that the bond was held by that holder.
The daily accruals of a holder of a REMIC residual bond will
be determined by allocating to each day during a calendar quarter its ratable
portion of a numerical calculation. That calculation is the product of the
adjusted issue price of the REMIC residual bond at the beginning of the calendar
quarter and 120% of the long-term Federal rate in effect on the date of initial
issuance. For this purpose, the adjusted issue price of a REMIC residual bond as
of the beginning of any calendar quarter will be equal to:
- the issue price of the bond, increased by
- the sum of the daily accruals for all prior quarters,
and decreased, but not below zero, by
- any payments made with respect to the bond before the
beginning of that quarter.
The issue price of a REMIC residual bond is the initial
offering price to the public at which a substantial amount of the REMIC residual
bonds were sold, but excluding sales to bond houses, brokers and underwriters
or, if no sales have been made, their initial value. The long-term Federal rate
is an average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
Although it has not done so, the Treasury Department has
authority to issue regulations that would treat the entire amount of income
accruing on a REMIC residual bond as excess inclusions if the REMIC residual
interest evidenced by that bond is considered not to have significant value.
For holders of REMIC residual bonds, excess inclusions:
- will not be permitted to be offset by deductions,
losses or loss carryovers from other activities,
- will be treated as unrelated business taxable income
to an otherwise tax-exempt organization, and
- will not be eligible for any rate reduction or
exemption under any applicable tax treaty with
respect to the 30% United States withholding tax
imposed on payments to holders of REMIC residual
bonds that are foreign investors. See, however,
"--REMICs--Foreign Investors in REMIC Bonds" below.
Furthermore, for purposes of the alternative minimum tax:
- excess inclusions will not be permitted to be offset
by the alternative tax net operating loss deduction,
and
- alternative minimum taxable income may not be less
than the taxpayer's excess inclusions.
This last rule has the effect of preventing non-refundable tax credits from
reducing the taxpayer's income tax to an amount lower than the alternative
minimum tax on excess inclusions.
In the case of any REMIC residual bonds held by a real estate
investment trust, or REIT, the total excess inclusions with respect to these
REMIC residual bonds will be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT. Any
amount
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so allocated will be treated as an excess inclusion with respect to a REMIC
residual bond as if held directly by the shareholder. The total excess
inclusions referred to in the previous sentence will be reduced, but not below
zero, by any REIT taxable income, within the meaning of Section 857(b)(2) of the
Internal Revenue Code, other than any net capital gain. Treasury regulations yet
to be issued could apply a similar rule to:
- regulated investment companies,
- common trusts, and
- some cooperatives.
The Treasury regulations, however, currently do not address this subject.
NONECONOMIC REMIC RESIDUAL BONDS. Under the Treasury
regulations, transfers of noneconomic REMIC residual bonds will be disregarded
for all federal income tax purposes if "a significant purpose of the transfer
was to enable the transferor to impede the assessment or collection of tax." If
a transfer is disregarded, the purported transferor will continue to remain
liable for any taxes due with respect to the income on the noneconomic REMIC
residual bond. The Treasury regulations provide that a REMIC residual bond is
noneconomic unless, based on the prepayment assumption and on any required or
permitted clean up calls, or required liquidation provided for in the related
Governing Documents:
- the present value of the expected future payments on
the REMIC residual bond equals at least the present
value of the expected tax on the anticipated excess
inclusions, and
- the transferor reasonably expects that the transferee
will receive payments with respect to the REMIC
residual bond at or after the time the taxes accrue
on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes.
The present value calculation referred to above is calculated using the
applicable Federal rate for obligations whose term ends on the close of the last
quarter in which excess inclusions are expected to accrue with respect to the
REMIC residual bond. This rate is computed and published monthly by the IRS.
Accordingly, all transfers of REMIC residual bonds that may
constitute noneconomic residual interests will be subject to some restrictions
under the terms of the related Governing Documents that are intended to reduce
the possibility of any transfer being disregarded. These restrictions will
require an affidavit:
- from each party to the transfer, stating that no
purpose of the transfer is to impede the assessment
or collection of tax,
- from the prospective transferee, providing limited
representations as to its financial condition, and
- from the prospective transferor, stating that it has
made a reasonable investigation to determine the
transferee's historic payment of its debts and
ability to continue to pay its debts as they come due
in the future.
The Treasury recently issued proposed regulations that would
revise this safe harbor. The proposed regulations would make the safe harbor
unavailable unless the present value of the anticipated tax liabilities
associated with holding the residual interest did not exceed the sum of:
- the present value of any consideration given to the
transferee to acquire the interest,
- the present value of the expected future
distributions on the interest, and
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- the present value of the anticipated tax savings
associated with the holding of the interest as the
REMIC generates losses.
Present values would be computed using a discount rate equal to an applicable
Federal rate, except that if a transferee could demonstrate that it borrowed
regularly in the course of its trade or business substantial funds at a lower
rate from unrelated third parties, that lower rate could be used as the discount
rate.
It is not clear when those regulations would be effective.
Although the text of the proposed regulations states that they would be
effective on February 4, 2000, the preamble to the proposed regulations says
that these regulations will apply to transfers of REMIC residual interests made
after the date the final regulations are published in the Federal Register. The
Treasury Department is anticipated to issue clarification with regard to these
conflicting statements regarding the effective date of the proposed regulations
shortly.
Prior to purchasing a REMIC residual bond, prospective
purchasers should consider the possibility that a purported transfer of a REMIC
residual bond to another party at some future date may be disregarded in
accordance with the above-described rules. This would result in the retention of
tax liability by the transferor with respect to that purported transfer.
We will disclose in the related prospectus supplement whether
the offered REMIC residual bonds may be considered noneconomic residual
interests under the Treasury regulations. However, we will base any disclosure
that a REMIC residual bond will not be considered noneconomic upon various
assumptions. Further, we will make no representation that a REMIC residual bond
will not be considered noneconomic for purposes of the above-described rules.
See "--REMICs--Foreign Investors in REMIC Bonds" below for
additional restrictions applicable to transfers of REMIC residual bonds to
foreign persons.
MARK-TO-MARKET RULES. Regulations under Section 475 of the
Internal Revenue Code require that a securities dealer mark to market securities
held for sale to customers. This mark-to-market requirement applies to all
securities owned by a dealer, except to the extent that the dealer has
specifically identified a security as held for investment. These regulations
provide that for purposes of this mark-to-market requirement, a REMIC residual
bond is not treated as a security for purposes of Section 475 of the Internal
Revenue Code. Thus, a REMIC residual bond is not subject to the mark-to-market
rules. We recommend that prospective purchasers of a REMIC residual bond consult
their tax advisors regarding these new regulations.
TRANSFERS OF REMIC RESIDUAL BONDS TO INVESTORS THAT ARE
FOREIGN PERSONS. Unless we otherwise state in the related prospectus
supplement, transfers of REMIC residual bonds to investors that are foreign
persons under the Internal Revenue Code will be prohibited under the related
Governing Documents.
If transfers of REMIC residual bonds to investors that are
foreign persons are permitted under the related Governing Documents, and such
a transfer takes place, then it is possible that the transfer will be
disregarded for all federal tax purposes. The applicable Treasury regulations
provide that a transfer of a REMIC residual bond that has "tax avoidance
potential" to a non-U.S. Person will be disregarded for all federal tax
purposes, unless the transferee's income is effectively connected with the
conduct of a trade or business within the United States. A REMIC residual
bond is deemed to have tax avoidance potential unless, at the time of the
transfer-
- the future value of expected distributions equals
at least 30% of the anticipated excess inclusions
after the transfer, and
- the transferor reasonably expects that the
transferee will receive sufficient distributions
from the REMIC at or after the time at which the
excess inclusions accrue and prior to the end of
the next succeeding taxable year for the
accumulated withholding tax liability to be paid.
If the non-U.S. Person transfers the REMIC residual bond
back to a U.S. Person, the transfer will be disregarded and the foreign
transferor will continue to be treated as the owner unless arrangements are
made so that the transfer does not have the effect of allowing the transferor
to avoid tax on accrued excess inclusions.
PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC residual bonds. The applicable Treasury regulations indicate, however,
that in the case of a REMIC that is similar to a single class grantor trust, all
or a portion of these fees and expenses should be allocated to the holders of
the related REMIC regular bonds. Unless we state otherwise in the related
prospectus supplement, however, these fees and expenses will be allocated to
holders of the related REMIC residual bonds in their entirety and not to the
holders of the related REMIC regular bonds.
If the holder of a REMIC bond receives an allocation of fees
and expenses in accordance with the preceding discussion, and if that holder is:
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- an individual,
- an estate or trust, or
- a Pass-Through Entity beneficially owned by one or
more individuals, estates or trusts,
then--
- an amount equal to this individual's, estate's or
trust's share of these fees and expenses will be
added to the gross income of this holder, and
- the individual's, estate's or trust's share of these
fees and expenses will be treated as a miscellaneous
itemized deduction allowable subject to the
limitation of Section 67 of the Internal Revenue
Code, which permits the deduction of these fees and
expenses only to the extent they exceed, in total, 2%
of a taxpayer's adjusted gross income.
In addition, Section 68 of the Internal Revenue Code provides
that the amount of itemized deductions otherwise allowable for an individual
whose adjusted gross income exceeds a specified amount will be reduced by the
lesser of:
- 3% of the excess of the individual's adjusted gross
income over the specified amount, or
- 80% of the amount of itemized deductions otherwise
allowable for the taxable year.
Furthermore, in determining the alternative minimum taxable
income of a holder of a REMIC bond that is--
- an individual,
- an estate or trust, or
- a "Pass-Through Entity" beneficially owned by one or
more individuals, estates or trusts,
no deduction will be allowed for the holder's allocable portion of servicing
fees and other miscellaneous itemized deductions of the REMIC, even though an
amount equal to the amount of these fees and other deductions will be included
in the holder's gross income.
The amount of additional taxable income reportable by holders
of REMIC bonds that are subject to the limitations of either Section 67 or
Section 68 of the Internal Revenue Code, or to the complete disallowance of the
related expenses for alternative minimum tax purposes, may be substantial.
Accordingly, REMIC bonds to which these expenses are allocated
will generally not be appropriate investments for:
- an individual,
- an estate or trust, or
- a Pass-Through Entity beneficially owned by one or
more individuals, estates or trusts.
We recommend that those prospective investors consult with
their tax advisors prior to making an investment in a REMIC bond to which these
expenses are allocated.
SALES OF REMIC BONDS. If a REMIC bond is sold, the selling
bondholder will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the REMIC bond. The
adjusted basis of a REMIC regular bond generally will equal:
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- the cost of the bond to that bondholder, increased by
- income reported by that bondholder with respect to
the bond, including original issue discount and
market discount income, and reduced, but not below
zero, by
- payments on the bond received by that bondholder and
by that amortized premium.
The adjusted basis of a REMIC residual bond will be determined
as described above under "--REMICs--Taxation of Owners of REMIC Residual
Bonds--Basis Rules, Net Losses and Distributions." Except as described below in
this "--Sale of REMIC Bonds" subsection, any gain or loss from your sale of a
REMIC bond will be capital gain or loss, provided that you hold the bond as a
capital asset within the meaning of Section 1221 of the Internal Revenue Code,
which is generally property held for investment.
In addition to the recognition of gain or loss on actual
sales, the Internal Revenue Code requires the recognition of gain, but not loss,
upon the constructive sale of an appreciated financial position. A constructive
sale of an appreciated financial position occurs if a taxpayer enters into a
transaction or series of transactions that have the effect of substantially
eliminating the taxpayer's risk of loss and opportunity for gain with respect to
the financial instrument. Debt instruments that--
- entitle the holder to a specified principal amount,
- pay interest at a fixed or variable rate, and
- are not convertible into the stock of the issuer or a
related party,
cannot be the subject of a constructive sale for this purpose. Because most
REMIC regular bonds meet this exception, Section 1259 will not apply to most
REMIC regular bonds. However, REMIC regular bonds that have no, or a
disproportionately small, amount of principal can be the subject of a
constructive sale.
Finally, a taxpayer may elect to have net capital gain taxed
at ordinary income rates rather than capital gains rates in order to include the
net capital gain in total net investment income for the taxable year. A taxpayer
would do so because of the rule that limits the deduction of interest on
indebtedness incurred to purchase or carry property held for investment to a
taxpayer's net investment income.
As of the date of this prospectus, the Internal Revenue Code
provides for lower rates as to long-term capital gains than those applicable to
the short-term capital gains and ordinary income recognized or received by
individuals. No similar rate differential exists for corporations. In addition,
the distinction between a capital gain or loss and ordinary income or loss is
relevant for other purposes to both individuals and corporations.
Gain from the sale of a REMIC regular bond that might
otherwise be a capital gain will be treated as ordinary income to the extent
that the gain does not exceed the excess, if any, of:
- the amount that would have been includible in the
seller's income with respect to that REMIC regular
bond assuming that income had accrued on the bond at
a rate equal to 110% of the applicable Federal rate
determined as of the date of purchase of the bond,
which is a rate based on an average of current yields
on Treasury securities having a maturity comparable
to that of the bond based on the application of the
prepayment assumption to the bond, over
- the amount of ordinary income actually includible in
the seller's income prior to that sale.
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In addition, gain recognized on the sale of a REMIC regular
bond by a seller who purchased the bond at a market discount will be taxable as
ordinary income in an amount not exceeding the portion of that discount that
accrued during the period the bond was held by the seller, reduced by any market
discount included in income under the rules described above under
"--REMICs--Taxation of Owners of REMIC Regular Bonds--Market Discount" and
"--Premium."
REMIC bonds will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Internal Revenue Code, so that gain or loss
recognized from the sale of a REMIC bond by a bank or thrift institution to
which that section of the Internal Revenue Code applies will be ordinary income
or loss.
A portion of any gain from the sale of a REMIC regular bond
that might otherwise be capital gain may be treated as ordinary income to the
extent that a holder holds the bond as part of a "conversion transaction" within
the meaning of Section 1258 of the Internal Revenue Code. A conversion
transaction generally is one in which the taxpayer has taken two or more
positions in the same or similar property that reduce or eliminate market risk,
if substantially all of the taxpayer's return is attributable to the time value
of the taxpayer's net investment in that transaction. The amount of gain so
realized in a conversion transaction that is recharacterized as ordinary income
generally will not exceed the amount of interest that would have accrued on the
taxpayer's net investment at 120% of the appropriate applicable Federal rate at
the time the taxpayer enters into the conversion transaction, subject to
appropriate reduction for prior inclusion of interest and other ordinary income
items from the transaction.
Except as may be provided in Treasury regulations yet to be
issued, a loss realized on the sale of a REMIC residual bond will be subject to
the "wash sale" rules of Section 1091 of the Internal Revenue Code, if during
the period beginning six months before, and ending six months after, the date of
that sale the seller of that bond:
- reacquires that same REMIC residual bond,
- acquires any other residual interest in a REMIC, or
- acquires any similar interest in a taxable mortgage
pool, as is defined in Section 7701(i) of the
Internal Revenue Code.
In that event, any loss realized by the holder of a REMIC residual bond on the
sale will not be recognized or deductible currently, but instead will be added
to that holder's adjusted basis in the newly-acquired asset.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES. The Internal
Revenue Code imposes a tax on REMICs equal to 100% of the net income derived
from prohibited transactions. In general, subject to specified exceptions, a
prohibited transaction includes:
- the disposition of a non-defaulted mortgage loan,
- the receipt of income from a source other than a
mortgage loan or other permitted investments,
- the receipt of compensation for services, or
- the gain from the disposition of an asset purchased
with collections on the mortgage loans for temporary
investment pending payment on the REMIC bonds.
It is not anticipated that any REMIC will engage in any prohibited transactions
as to which it would be subject to this tax.
In addition, some contributions to a REMIC made after the day
on which the REMIC issues all of its interests could result in the imposition of
a tax on the REMIC equal to 100% of the value of the
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contributed property. The related Governing Documents will include provisions
designed to prevent the acceptance of any contributions that would be subject to
this tax.
REMICs also are subject to federal income tax at the highest
corporate rate on Net Income From Foreclosure Property, determined by reference
to the rules applicable to REITs. The related Governing Documents may permit the
special servicer to conduct activities with respect to a mortgaged property
acquired as part of a trust estate in a manner that causes the trust estate to
incur this tax if doing so would, in the reasonable discretion of the special
servicer, maximize the net after-tax proceeds to bondholders. However, under no
circumstance may the special servicer allow the acquired mortgaged property to
cease to be a "permitted investment" under Section 860G(a)(5) of the Internal
Revenue Code.
Unless we otherwise disclose in the related prospectus
supplement, it is not anticipated that any material state or local income or
franchise tax will be imposed on any REMIC.
Unless we state otherwise in the related prospectus
supplement, and to the extent permitted by then applicable laws, any tax on
prohibited transactions, specified contributions or Net Income From Foreclosure
Property, and any state or local income or franchise tax, that may be imposed on
the REMIC will be borne by the related bond trustee, tax administrator, master
servicer, special servicer or manager, in any case out of its own funds,
provided that--
- the person has sufficient assets to do so, and
- the tax arises out of a breach of that person's
obligations under the related Governing Documents.
Any tax not borne by one of these persons would be charged against the related
trust estate resulting in a reduction in amounts payable to holders of the
related REMIC bonds.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL BONDS TO
PARTICULAR ORGANIZATIONS. If a REMIC residual bond is transferred to a
Disqualified Organization, a tax will be imposed in an amount equal to the
product of:
- the present value of the total anticipated excess
inclusions with respect to the REMIC residual bond
for periods after the transfer, and
- the highest marginal federal income tax rate
applicable to corporations.
The value of the anticipated excess inclusions is discounted using the
applicable Federal rate for obligations whose term ends on the close of the last
quarter in which excess inclusions are expected to accrue with respect to the
REMIC residual bond.
The anticipated excess inclusions must be determined as of the
date that the REMIC residual bond is transferred and must be based on:
- events that have occurred up to the time of the
transfer,
- the prepayment assumption, and
- any required or permitted clean up calls or required
liquidation provided for in the related Governing
Documents.
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The tax on transfers to Disqualified Organizations generally
would be imposed on the transferor of the REMIC residual bond, except when the
transfer is through an agent for a Disqualified Organization. In that case, the
tax would instead be imposed on the agent. However, a transferor of a REMIC
residual bond would in no event be liable for the tax with respect to a transfer
if:
- the transferee furnishes to the transferor an
affidavit that the transferee is not a Disqualified
Organization, and
- as of the time of the transfer, the transferor does
not have actual knowledge that the affidavit is
false.
In addition, if a Pass-Through Entity includes in income
excess inclusions with respect to a REMIC residual bond, and a Disqualified
Organization is the record holder of an interest in that entity, then a tax will
be imposed on that entity equal to the product of:
- the amount of excess inclusions on the bond that are
allocable to the interest in the Pass-Through Entity
held by the Disqualified Organization, and
- the highest marginal federal income tax rate imposed
on corporations.
A Pass-Through Entity will not be subject to this tax for any
period, however, if each record holder of an interest in that Pass-Through
Entity furnishes to that Pass-Through Entity:
- the holder's social security number and a statement
under penalties of perjury that the social security
number is that of the record holder, or
- a statement under penalties of perjury that the
record holder is not a Disqualified Organization.
For taxable years beginning on or after January 1, 1998, if an
Electing Large Partnership holds a REMIC residual bond, all interests in the
Electing Large Partnership are treated as held by Disqualified Organizations for
purposes of the tax imposed on pass-through entities described in the second
preceding paragraph. This tax on Electing Large Partnerships must be paid even
if each record holder of an interest in that partnership provides a statement
mentioned in the prior paragraph.
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In addition, a person holding an interest in a Pass-Through
Entity as a nominee for another person will, with respect to that interest, be
treated as a Pass-Through Entity.
Moreover, an entity will not qualify as a REMIC unless there
are reasonable arrangements designed to ensure that:
- the residual interests in the entity are not held by
Disqualified Organizations, and
- the information necessary for the application of the
tax described in this prospectus will be made
available.
We will include in the related Governing Documents
restrictions on the transfer of REMIC residual bonds and some other provisions
that are intended to meet this requirement, and we will discuss those
restrictions and provisions in any prospectus supplement relating to the
offering of any REMIC residual bond.
The Clinton Administration recently proposed in its budget
specified amendments to the REMIC provisions designed to ensure that income
taxes imposed on the holder of a REMIC residual interest are paid when due.
Those provisions would impose secondary liability on the REMIC itself for any
tax required to be paid with respect to the income allocated to a REMIC residual
interest if the holder does not pay its taxes on that income when they are due.
If adopted, the amendments would be effective for REMICs created after the date
of enactment. It is not possible to predict whether the legislation will be
adopted or, if so, in what form.
TERMINATION. A REMIC will terminate immediately after the
payment date following receipt by the REMIC of the final payment with respect to
the related mortgage loans or upon a sale of the REMIC's assets following the
adoption by the REMIC of a plan of complete liquidation. The last payment on a
REMIC regular bond will be treated as a payment in retirement of a debt
instrument. In the case of a REMIC residual bond, if the last payment on that
bond is less than the REMIC residual bondholder's adjusted basis in the bond,
that holder should, but may not, be treated as realizing a capital loss equal to
the amount of that difference.
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REPORTING AND OTHER ADMINISTRATIVE MATTERS. Solely for
purposes of the administrative provisions of the Internal Revenue Code, a REMIC
will be treated as a partnership and holders of the related REMIC residual bonds
will be treated as partners. Unless we otherwise state in the related prospectus
supplement, the related tax administrator will file REMIC federal income tax
returns on behalf of the REMIC, and will be designated as and will act as or on
behalf of the "tax matters person" with respect to the REMIC in all respects.
The related tax administrator may hold at least a nominal amount of REMIC
residual bonds.
As, or as agent for, the tax matters person, the related tax
administrator, subject to applicable notice requirements and various
restrictions and limitations, generally will have the authority to act on behalf
of the REMIC and the holders of the REMIC residual bonds in connection with the
administrative and judicial review of the REMIC's--
- income,
- deductions
- gains,
- losses, and
- classification as a REMIC.
Holders of REMIC residual bonds generally will be required to
report these REMIC items consistently with their treatment on the related
REMIC's tax return. In addition, these holders may in some circumstances be
bound by a settlement agreement between the related tax administrator, as, or as
agent for, the tax matters person, and the IRS concerning any REMIC item.
Adjustments made to the REMIC's tax return may require these holders to make
corresponding adjustments on their returns. An audit of the REMIC's tax return,
or the adjustments resulting from that audit, could result in an audit of a
holder's return.
No REMIC will be registered as a tax shelter under Section
6111 of the Internal Revenue Code. Any person that holds a REMIC residual bond
as a nominee for another person may be required to furnish to the related REMIC,
in a manner to be provided in Treasury regulations, the name and address of that
other person, as well as other information.
Reporting of interest income, including any original issue
discount, with respect to REMIC regular bonds is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent or made readily available through electronic
means to individual holders of REMIC regular bonds and the IRS. Holders of REMIC
regular bonds that are--
- corporations,
- trusts,
- securities dealers, and
- some other non-individuals,
will be provided interest and original issue discount income information and the
information set forth in the following paragraphs. This information will be
provided upon request in accordance with the requirements of the applicable
regulations. The information must be provided by the later of:
- 30 days after the end of the quarter for which the
information was requested, or
- two weeks after the receipt of the request.
The REMIC must also comply with rules requiring a REMIC
regular bond issued with original issue discount to disclose on its face the
amount of original issue discount and the issue date, and requiring that
information to be reported to the IRS. Reporting with respect to REMIC residual
bonds, including--
- income,
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- excess inclusions,
- investment expenses, and
- relevant information regarding qualification of the
REMIC's assets,
will be made as required under the Treasury regulations, generally on a
quarterly basis.
As applicable, the REMIC regular bond information reports will
include a statement of the adjusted issue price of the REMIC regular bond at the
beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, the regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--REMICs--Taxation of Owners of REMIC Regular
Bonds--Market Discount."
Unless we otherwise specify in the related prospectus
supplement, the responsibility for complying with the foregoing reporting rules
will be borne by the related tax administrator.
BACKUP WITHHOLDING WITH RESPECT TO REMIC BONDS. Payments of
interest and principal, as well as payments of proceeds from the sale of REMIC
bonds, may be subject to the backup withholding tax under Section 3406 of the
Internal Revenue Code at a rate of 31% if recipients of these payments:
- fail to furnish to the payor information regarding,
among other things, their taxpayer identification
numbers, or
- otherwise fail to establish an exemption from this
tax.
Any amounts deducted and withheld from a payment to a
recipient would be allowed as a credit against the recipient's federal income
tax. Furthermore, some penalties may be imposed by the IRS on a recipient of
payments that is required to supply information but that does not do so in the
proper manner.
FOREIGN INVESTORS IN REMIC BONDS. Unless we otherwise disclose
in the related prospectus supplement, a holder of a REMIC regular bond that is--
- a foreign person, and
- not subject to federal income tax as a result of any
direct or indirect connection to the United States in
addition to its ownership of that bond,
will normally not be subject to United States federal income or withholding tax
with respect to a payment on a REMIC regular bond. To avoid withholding or tax,
that holder must comply with applicable identification requirements. These
requirements include delivery of a statement, signed by the bondholder under
penalties of perjury, certifying that the bondholder is a foreign person and
providing the name and address of the bondholder.
On October 6, 1997, the Treasury Department issued new
regulations that modify the withholding, backup withholding and information
reporting rules described above. These regulations, as modified by Treasury
Decision 8856, will generally be effective for investments made after December
31, 2000, subject to applicable transition rules. Prospective investors are
urged to consult their own tax advisors regarding these regulations.
For these purposes, a foreign person is anyone other than a U.S. Person.
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It is possible that the IRS may assert that the foregoing tax
exemption should not apply with respect to a REMIC regular bond held by a person
or entity that owns directly or indirectly a 10% or greater interest in the
related REMIC residual bonds. If the holder does not qualify for exemption,
payments of interest, including payments with respect to accrued original issue
discount, to that holder may be subject to a tax rate of 30%, subject to
reduction under any applicable tax treaty.
It is possible, under regulations promulgated under Section
881 of the Internal Revenue Code concerning conduit financing transactions, that
the exemption from withholding taxes described above may also not be available
to a holder who is a foreign person and either--
- owns 10% or more of one or more underlying
mortgagors, or
- if the holder is a controlled foreign corporation, is
related to one or more mortgagors in the applicable
trust.
Further, it appears that a REMIC regular bond would not be
included in the estate of a nonresident alien individual and would not be
subject to United States estate taxes. However, it is recommended that
bondholders who are nonresident alien individuals consult their tax advisors
concerning this question.
Unless we otherwise state in the related prospectus
supplement, the related Governing Documents will prohibit transfers of REMIC
residual bonds to investors that are:
- foreign persons, or
- United States persons, if classified as a partnership
under the Internal Revenue Code, unless all of their
beneficial owners are United States persons.
FASITS
GENERAL. An election may be made to treat the trust estate for
a series of offered bonds or specified assets of that trust, as a financial
asset securitization investment trust, or FASIT, within the meaning of Section
860L(a) of the Code. The election would be noted in the applicable prospectus
supplement. If a FASIT election is made, the offered bonds will be designated as
classes of regular interests in the FASIT. With respect to each series of
offered bonds as to which the related tax administrator makes a FASIT election
and assuming, among other things:
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- the making of an appropriate election, and
- compliance with the related Governing Document
our counsel will deliver its opinion generally to the effect that:
- the relevant assets will qualify as a FASIT, and
- the FASIT bonds will represent "regular interests" in
that FASIT.
On February 4, 2000, the Treasury Department issued proposed
regulations relating to FASITs. References to the "FASIT proposed regulations"
in this discussion refer to those proposed regulations. The proposed regulations
have not been adopted as final and, in general, are not proposed to be effective
as of the date of this prospectus. They nevertheless are indicative of the rules
the Treasury Department currently views as appropriate with regard to the FASIT
provisions.
CHARACTERIZATION OF INVESTMENTS IN FASIT BONDS. FASIT bonds
held by a real estate investment trust will constitute "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Internal Revenue Code and
interest on the FASIT bonds will be considered "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Section 856(c)(3)(B) of the Internal Revenue Code in the same
proportion, for both purposes, that the assets and income of the FASIT would be
so treated. FASIT bonds held by a domestic building and loan association will be
treated as "regular interest[s] in a FASIT" under section 7701(a)(19)(C)(xi) of
the Internal Revenue Code, but only in the proportion that the FASIT holds
"loans secured by an interest in real property which is . . . residential real
property" within the meaning of section 7701(a)(19)(C)(v) of the Internal
Revenue Code. For this purpose, mortgage loans secured by multifamily
residential housing should qualify. It is also likely that mortgage loans
secured by health care related facilities would qualify as "loans secured by an
interest in . . . health institutions or facilities, including structures
designed or used primarily for residential purposes for . . . persons under
care" within the meaning of Section 7701(a)(19)(C)(vii) of the Internal Revenue
Code. If at all times 95% or more of the assets of the FASIT or the income on
those assets qualify for the foregoing treatments, the FASIT bonds will qualify
for the corresponding status in their entirety. Mortgage loans which have been
defeased with Treasury obligations and the income from those loans will not
qualify for the foregoing treatments. Accordingly, the FASIT bonds may not be a
suitable investment for you if you require a specific amount or percentage of
assets or income meeting the foregoing treatments. For purposes of Section
856(c)(4)(A) of the Internal Revenue Code, payments of principal and interest on
a mortgage loan that are reinvested pending distribution to holders of FASIT
bonds should qualify for that treatment. FASIT bonds held by a regulated
investment company will not constitute "government securities" within the
meaning of Section 851(b)(4)(A)(i) of the Internal Revenue Code. FASIT bonds
held by specified financial institutions will constitute an "evidence of
indebtedness" within the meaning of Section 582(c)(1) of the Internal Revenue
Code.
QUALIFICATION AS A FASIT.
GENERAL. In order to qualify as a FASIT, the trust estate for
a series of offered bonds or specified assets of that trust must comply with the
requirements set forth in the Internal Revenue Code on an ongoing basis. The
FASIT must fulfill an asset test, which requires that substantially all of the
assets of the FASIT, as of, and at all times following, the close of the third
calendar month beginning after the FASIT's startup day, which for purposes of
this discussion is the date of the initial issuance of the FASIT regular bonds,
and at all times thereafter, be permitted assets for a FASIT.
Permitted assets for a FASIT include-
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- cash or cash equivalents,
- specified types of debt instruments, other than debt
instruments issued by the owner of the FASIT or a
related party, and contracts to acquire those debt
instruments,
- hedges and contracts to acquire the same,
- foreclosure property, and
- regular interests in another FASIT or in a REMIC.
As discussed below in this "- Qualification as a FASIT"
subsection, specified restrictions apply to each type of permitted asset, as
discussed below.
Under the FASIT proposed regulations, the "substantially all"
requirement would be met if at all times the total adjusted basis of the
permitted assets is more than 99 percent of the total adjusted basis of all the
assets held by the FASIT, including assets deemed to be held by the FASIT under
Section 860I(b)(2) of the Internal Revenue Code because they support a regular
interest in the FASIT.
The FASIT provisions also require the FASIT ownership interest
to be held only by fully taxable domestic corporations and do not recognize
transfers of high-yield regular interests to taxpayers other than fully taxable
domestic corporations or other FASITs. The related Governing Documents will
provide that no legal or beneficial interest in the ownership interest or in any
class or classes of bonds that we determine to be a high-yield regular interests
may be transferred or registered unless all applicable conditions, designed to
prevent violation of this requirement, are met.
PERMITTED ASSETS. The proposed regulations enumerate the types
of debt that qualify as permitted assets for a FASIT. The FASIT provisions
provide that permitted debt instruments must bear interest, if any, at a fixed
or qualified variable rate. Under the FASIT proposed regulations, the definition
of debt permitted to be held by a FASIT would include-
- REMIC regular interests,
- regular interests of other FASITs,
- inflation indexed debt instruments,
- credit card receivables, and
- some stripped bonds and coupons.
However, under the FASIT proposed regulations, equity linked
debt instruments and defaulted debt instruments would not be permitted assets
for a FASIT. In addition, a FASIT may not hold--
- debt of the owner of the FASIT ownership interest,
- debt guaranteed by the owner of the FASIT ownership
interest in circumstances such that the owner is in
substance the primary obligor on the debt instrument,
or
- debt issued by third-parties that is linked to the
performance or payments of debt instruments issued by
the owner or a related person.
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Finally, debt that is traded on an established securities market and subject
to a foreign withholding tax is not a permitted asset for a FASIT.
Permitted hedges include interest rate or foreign currency
notional principal contracts, letters of credit, insurance, guarantees of
payment default and similar instruments. These hedges must be reasonably
required to guarantee or hedge against the FASIT's risks associated with being
the obligor on interests issued by the FASIT. The FASIT proposed regulations do
not include a list of specified permitted hedges or guarantees, but rather focus
on the intended function of a hedge and permit the contract to offset the
following risk factors:
- fluctuations in market interest rates;
- fluctuations in currency exchange rates;
- the credit quality of, or default on, the FASIT's
assets or debt instruments underlying the FASIT's
assets; and
- the receipt of payments on the FASIT's assets earlier
or later than originally anticipated.
The FASIT proposed regulations prohibit a hedge or guarantee
from referencing assets other than permitted assets, indices, economic
indicators or financial averages that are not both widely disseminated and
designed to correlate closely with the changes in one or more of the risk
factors described in the preceding paragraph. However, under the FASIT proposed
regulations, FASIT owners will be able to hold hedges or guarantees inside a
FASIT that do not relate to the already issued regular interests, or to assets
the FASIT already holds, if the FASIT expects to issue regular interests, or
expects to hold assets, that are related to the hedge or guarantee in question.
The proposed regulations also place some restrictions on hedges and guarantees
entered into with the holder of the FASIT ownership interest or a related party.
Property acquired in connection with the default or imminent
default of a debt instrument held by a FASIT may qualify both as foreclosure
property and as a type of permitted asset under the FASIT provisions. It will in
general continue to qualify as foreclosure property during a grace period that
runs until the end of the third taxable year beginning after the taxable year in
which the FASIT acquires the foreclosure property. Under the FASIT proposed
regulations, if the foreclosure property also would qualify as another type of
permitted asset, it may be held beyond the close of that grace period. However,
at the close of the grace period, gain, if any, on the property must be
recognized as if the property had been contributed by the owner of the FASIT on
that date. In addition, the FASIT proposed regulations provide that, after the
close of the grace period, disposition of the foreclosure property is
potentially subject to a 100% prohibited transactions tax, as described below
under the "--Prohibited Transactions and Other Taxes" subsection, without the
benefit of an exception to this tax applicable to sales of foreclosure
property.
PERMITTED INTERESTS. In addition to the foregoing, interests
in a FASIT also must meet specified requirements. All of the interests in a
FASIT must be either of the following:
- a single class of ownership interest, or
- one or more classes of regular interests.
An ownership interest is an interest in a FASIT other than a regular interest
that is issued on the startup day, is designated an ownership interest and is
held by a single, fully-taxable, domestic corporation. A regular interest is an
interest in a FASIT that is issued on or after the startup day with fixed terms,
is designated as a regular interest, and--
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1. unconditionally entitles the holder to receive a
specified principal amount or other similar amount,
2. provides that interest payments or other similar
amounts, if any, at or before maturity either are
payable based on a fixed rate or a qualified variable
rate,
3. has a stated maturity of not longer than 30 years,
4. has an issue price not greater than 125% of its
stated principal amount, and
5. has a yield to maturity not greater than 5 percentage
points higher than the applicable Federal rate, as
defined in Section 1274(d) of the Internal Revenue
Code, for Treasury obligations of a similar maturity.
A regular interest that is described in the preceding sentence except that it
fails to meet one or more of requirements 1, 4 or 5, is a high-yield regular
interest. Further, to be a high-yield regular interest, an interest that fails
requirement 2 must consist of a specified portion of the interest payments on
the permitted assets, determined by reference to the rules related to permitted
rates for REMIC regular interests that have no, or a disproportionately small,
amount of principal. An interest in a FASIT may be treated as a regular interest
even if payments of principal with respect to that interest are subordinated to
payments on other regular interests or the ownership interest in the FASIT, and
are contingent on--
- the absence of defaults or delinquencies on permitted
assets,
- lower than reasonably expected returns on permitted
assets,
- unanticipated expenses incurred by the FASIT, or
- prepayment interest shortfalls.
CESSATION OF FASIT. If an entity fails to comply with one or
more of the ongoing requirements of the Internal Revenue Code for status as a
FASIT during any taxable year, the Internal Revenue Code provides that the
entity or applicable portion of that entity will not be treated as a FASIT
thereafter. In this event, any entity that holds mortgage loans and is the
obligor with respect to debt obligations with two or more maturities will be
classified, presumably, as a taxable mortgage pool under general federal income
tax principles , and the FASIT bonds may be treated as equity interests in the
entity. Under the FASIT proposed regulations, the underlying arrangement
generally cannot reelect FASIT status and any election a FASIT owner made, other
than the FASIT election, and any method of accounting adopted with respect to
the FASIT assets, binds the underlying arrangement as if the underlying
arrangement itself had made those elections or adopted that method. In the case
of an inadvertent cessation of a FASIT, under the FASIT proposed regulations,
the Commissioner of the IRS may grant relief from the adverse consequences of
that cessation, subject to those adjustments as the Commissioner may require the
FASIT and all holders of interests in the FASIT to accept with respect to the
period in which the FASIT failed to qualify as such.
Under the proposed FASIT regulation, apart from failure to
qualify as a FASIT, a FASIT may not revoke its election or cease to be a FASIT
without the consent of the Commissioner of the IRS.
Regular interest holders, in the case of cessation of a FASIT,
are treated as exchanging their FASIT regular interests for new interests in the
underlying arrangement. The FASIT proposed regulations would classify the new
interests under general principles of Federal income tax law, for example, as
interests in debt instruments, as interest in a partnership or interests in an
entity subject to corporate taxation, depending on what the classification of
those interests would have been in the absence of a FASIT election. On the
deemed receipt of that new interest, under the FASIT proposed regulations, you
would be required to mark the new interests to market and to recognize gain, but
would not be permitted to recognize loss, as though the old interest had been
sold for an
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amount equal to the fair market value of the new interest. Your basis in the new
interest deemed received in the underlying arrangement would equal your basis in
the FASIT regular interest exchanged for it, increased by any gain you
recognized on the deemed exchange.
TAXATION OF FASIT BONDS. The FASIT bonds generally will be
treated for federal income tax purposes as newly-originated debt instruments. In
general, subject to the discussion below concerning high-yield interests:
- interest, original issue discount and market discount
on a FASIT bond will be treated as ordinary income to
the holder of that certificate; and
- principal payments, other than principal payments
that do not exceed accrued market discount, on a
FASIT bond will be treated as a return of capital to
the extent of the holder's basis allocable to that
bond.
You must use the accrual method of accounting with respect to
FASIT bonds, regardless of the method of accounting you otherwise use.
Except as set forth in the applicable prospectus supplement
and in the immediately following discussion concerning high-yield interests, the
discussions above under the headings "--REMICs--Taxation of Owners of REMIC
Regular Bonds--Original Issue Discount," "--Market Discount," "--Premium," and
"--Realized Losses" will apply to the FASIT bonds. The discussion under the
headings "--REMICs--Sales of REMIC Bonds" will also apply to the FASIT bonds,
except that the treatment of a portion of the gain on a REMIC regular interest
as ordinary income to the extent the yield on those bonds did not exceed 110% of
the applicable Federal rate will not apply.
HIGH YIELD INTERESTS; ANTI-AVOIDANCE EXCISE TAXES ON TIERED
ARRANGEMENTS. The taxable income, and the alternative minimum taxable income, of
any holder of a high-yield interest may not be less than the taxable income from
all high-yield interests and FASIT ownership interests that it holds, together
with any excess inclusions with respect to REMIC residual interests that it
owns.
High yield interests may only be held by fully taxable,
domestic C corporations or another FASIT. Any attempted transfer of a high-yield
interest to any other type of taxpayer will be disregarded, and the transferor
will be required to include in its gross income the amount of income
attributable to the high-yield interest notwithstanding its attempted transfer.
The related Governing Documents will contain provisions and procedures designed
to assure that, in general, only domestic C corporations or other FASITs may
acquire high-yield interests. There is an exception allowing non-corporate
taxpayers that hold high-yield interest exclusively for sale to customers in the
ordinary course of business to do so, subject to an excise tax imposed at the
corporate income tax rate if the holder ceases to be a dealer or begins to hold
the high-yield interest for investment. Unless otherwise specified in the
prospectus supplement, the related Governing Documents will also allow those
holders to hold high-yield interests.
To prevent the avoidance of these rules through tiered
arrangements, an excise tax is imposed on any Pass-Through Entity, which, under
the FASIT proposed regulations, includes a REMIC, that:
- holds any FASIT regular interest, whether or not that
FASIT regular interest is a high-yield interest; and
- issues a debt or equity interest that is--
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1. supported by that FASIT regular interest,
and
2. has a yield, higher than the yield on that
FASIT regular interest, that would cause
that debt or equity interest to be a high
yield interest if it had been issued by a
FASIT.
Under the statute, the amount of that tax, which is imposed on the Pass-Through
Entity, is the highest corporate income tax rate applied to the income of the
holder of the debt or equity interest properly attributable to the FASIT regular
interest that supports it. The proposed FASIT regulations provide that the tax
is an excise tax that must be paid on or before the due date of the Pass-Through
Entity's tax return for the taxable year in which it issues the debt or equity
interest. This appears to contemplate a one-time payment on all future income
from the FASIT regular interest that is projected to be properly attributable to
the debt or equity interest it supports. It is not clear how this amount is to
be determined.
PROHIBITED TRANSACTIONS AND OTHER TAXES. Income or gain from
prohibited transactions by a FASIT are taxable to the holder of the ownership
interest in that FASIT at a 100% rate. Prohibited transactions generally
include, under the FASIT statutory provisions and proposed FASIT regulations:
- the receipt of income from other than permitted
assets;
- the receipt of compensation for services;
- the receipt of any income derived from a loan
originated by the FASIT; or
- the disposition of a permitted asset, including
disposition in connection with a cessation of FASIT
status, other than for--
1. foreclosure, default, or imminent default of
a qualified mortgage,
2. bankruptcy or insolvency of the FASIT,
3. substitution for another permitted debt
instrument or distribution of the debt
instrument to the holder of the ownership
interest to reduce overcollateralization,
but only if a principal purpose of acquiring
the debt instrument which is disposed of was
not the recognition of gain, or the
reduction of a loss, on the withdrawn asset
as a result of an increase in the market
value of the asset after its acquisition by
the FASIT, or
4. the retirement of a class of FASIT regular
interests.
The proposed regulations presume that some transactions will be loan
originations, but also provide safe harbors for loans originated by the FASIT.
The proposed safe harbors apply in the following circumstances:
- if the FASIT acquires the loan from an established
securities market as described in Treasury regulation
Sections 1.1273-2(f)(2) through (4),
- if the FASIT acquires the loan more than one year
after the loan was issued,
- if the FASIT acquires the loan from a person that
regularly originates similar loans in the ordinary
course of business,
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- if the FASIT receives any new loan from the same
obligor in exchange for the obligor's original loan
in the context of a work out, and
- when the FASIT makes a loan under a contract or
agreement in the nature of a line of credit the FASIT
is permitted to hold.
The FASIT provisions generally exclude from prohibited transactions the
substitution of a debt instruments for another debt instrument which is a
permitted asset and the distribution of a debt instrument contributed by the
holder of the ownership interest to that holder in order to reduce
over-collateralization of the FASIT. In addition, the FASIT proposed regulations
also exclude transactions involving the disposition of hedges from the category
of prohibited transactions. However, the proposed regulations deem a
distribution of debt to be carried out principally to recognize gain, and to be
a prohibited transaction, if the owner (or a related person) sells the
substituted or distributed debt instrument at a gain within 180 days of the
substitution or distribution. It is unclear the extent to which tax on those
transactions could be collected from the FASIT directly under the applicable
statutes rather than from the holder of the ownership interest. However, under
the related Governing Documents, any such prohibited transactions tax that is
not payable by a party to those documents as a result of its own actions will
be paid by the FASIT. It is not anticipated that the FASIT will engage in any
prohibited transactions.
The Clinton Administration recently proposed in its budget
specified amendments to the FASIT provisions designed to ensure that income
taxes imposed on the holder of a FASIT ownership interest are paid when due.
These provisions would impose secondary liability on the FASIT itself for any
tax required to be paid with respect to the income allocated to the FASIT
ownership interest if that holder does not pay its taxes on that income when
they are due. If adopted, the amendments would be effective for FASITs created
after the date of enactment. It is not possible to predict whether the
legislation will be adopted or, if so, in what form.
TAXATION OF FOREIGN INVESTORS. The federal income tax
treatment of non-U.S. Persons who own FASIT bonds that are not high-yield
interests is the same as that described above under "--REMICs--Foreign
Investors in REMIC Bonds." However, if you are a non-U.S. Person that holds a
regular interest, either directly or indirectly, in a FASIT, you should note
that under the FASIT proposed regulations, interest paid or accrued on a debt
instrument held by the FASIT is treated as being received by you directly from
a conduit debtor for purposes of Subtitle A of the Internal Revenue Code and
the related regulations thereunder if:
- you are a 10% shareholder of an obligor on a debt
instrument held by the FASIT;
- you are a controlled foreign corporation to which an
obligor on a debt instrument held by the FASIT is a
related person; or
- you are related to such an obligor that is a
corporation or partnership, in general, having common
ownership to a greater than 50% extent.
If you believe you may be in one of these categories, you
should consult with your tax advisors, in particular concerning the possible
imposition of United States withholding taxes at a 30% rate on interest paid
with respect to a FASIT regular interest under these circumstances.
High-yield FASIT bonds may not be sold to or beneficially
owned by non-U.S. Persons. Any such purported transfer to a non-U.S. Person
will be null and void and, upon the related bond trustee's discovery of any
purported transfer in violation of this requirement, the last preceding owner
of those FASIT bonds will be restored to ownership as completely as possible.
The last preceding owner will, in any event, be taxable on all income with
respect to those FASIT bonds for federal income tax purposes. The related
Governing Documents will provide
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that, as a condition to transfer of a high-yield FASIT bonds, the proposed
transferee must furnish an affidavit as to its status as a U.S. Person and
otherwise as a permitted transferee.
BACKUP WITHHOLDING. Payments made on the FASIT bonds, and
proceeds from the sale of the FASIT bonds to or through some brokers, may be
subject to a backup withholding tax under Section 3406 of the Internal Revenue
Code in the same manner as described above under "--REMICs--Backup Withholding
with Respect to REMIC Bonds" above.
REPORTING REQUIREMENTS. Reports of accrued interest, OID, if
any, and information necessary to compute the accrual of any market discount on
the FASIT bonds will be made annually to the IRS and to investors in the same
manner as described under "--REMICs--Reporting and Other Administrative Matters"
above.
DEBT AND NOTIONAL PRINCIPAL CONTRACTS
GENERAL. If the related Governing Documents do not provide for
any person or entity to make a REMIC or FASIT election with respect to a series
of offered bonds, then, our counsel will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the Governing Documents,
and subject to specified assumptions set forth in the opinion, those bonds will
be characterized as indebtedness of, or notional principal contracts issued by,
the related issuer, and not as an ownership interest in the related issuer or
related trust estate.
TAXATION OF ISSUERS THAT ARE TREATED AS TAXABLE MORTGAGE
POOLS. Taxable mortgage pool, or TMP, rules enacted as part of the Tax Reform
Act of 1986 generally treat as taxable corporations some arrangements in which
debt obligations are directly or indirectly secured or backed by real estate
mortgage loans. An entity, or a portion of an entity, is classified as a TMP
if--
- substantially all of its assets are debt obligations
and more than 50 percent of those debt obligations
are real estate mortgage loans or interests in real
estate mortgage loans,
- the entity is the obligor under debt obligations with
two or more maturities, and
- the timing of payments on the debt obligations issued
by that entity bears a relationship to the timing of
payments on the financial assets securing or backing
those obligations.
A group of mortgage loans or similar assets held by an entity can be treated as
a separate TMP if those loans or assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
One or more of the issuers of the offered bonds as to which no
REMIC or FASIT election is made may be treated as TMPs for federal income tax
purposes. In general, a TMP is treated for federal income tax purposes as a
corporation not includible with any other corporation in filing a consolidated
return. Subject to the remainder of this discussion, corporate tax will be
imposed on such an issuer's taxable income. That taxable income will consist of:
- the interest, discount and gain accrued or realized
with respect to the entity's mortgage loans and other
assets, reduced by
- the interest and original issue discount expense,
servicing fees, bad debt losses and other expenses or
losses accrued or realized by the issuer.
The corporate income taxes imposed on such an issuer will reduce the cash flow
available to make payments on the offered bonds.
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In addition--
- if such an issuer has gross income not accompanied by
current cash, such as accrued discount, negative
amortization or post-default interest, or
- is obligated to use income received to make
non-deductible payments, such as principal payments
on the offered bonds,
the need for cash to pay taxes could require a liquidation of part or all of the
collateral and, possibly, a retirement of offered bonds at a time earlier than
anticipated. It is not anticipated that any issuer will hold assets or issue
bonds having characteristics that would, in the absence of default on its
underlying assets, require cash flow otherwise intended to be used to make bond
payments to be instead used to make tax payments.
If an issuer is a REIT, or a wholly-owned subsidiary of a REIT
that is treated as a qualified REIT subsidiary, or QRS, under the Internal
Revenue Code, classification of the issuer as a TMP will not cause it to be
subject to corporate income taxation. Rather, the shareholder of the issuer, or
of the REIT that wholly owns the issuer, will be required to treat a portion of
their dividends from the REIT as excess inclusions, generally in an amount
equal to the amount that would be so treated if the issuer were a REMIC and the
REIT held the residual interest in that REMIC.
It is therefore possible that issuers as to which no REMIC or
FASIT election is made may be structured to qualify as, and elect to be treated
as, REITs or QRSs for federal income tax purposes. In that event, the related
prospectus supplement will describe the consequences of that classification and
of the failure of the issuer to be, or to maintain its status as, a REIT or a
QRS. The related prospectus supplement will also describe the conditions to
which any issuer has agreed regarding the maintenance of its status as a REIT
or a QRS, and the consequences under the governing documents if it does not do
so. No assurance beyond that contained in the governing documents will be given
that an issuer that initially is treated as a REIT or a QRS will continue to
qualify as such. If it failed to continue so to qualify, it would be subject to
the general rules with respect to TMPs described above in this "--Taxation of
Issuers That are Treated as Taxable Mortgage Pools" subsection.
CHARACTERIZATION OF INVESTMENTS IN ISSUER INDEBTEDNESS AND
NOTIONAL PRINCIPAL CONTRACTS. If offered bonds are characterized as indebtedness
of, or notional principal contracts issued by, the related issuer, then:
- those bonds will not constitute "loans. . . secured
by an interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Internal Revenue
Code when held by a domestic building and loan
association;
- those bonds will not constitute "real estate assets"
within the meaning of Section 856(c)(5)(A) of the
Internal Revenue Code when held by a REIT;
- interest on those bonds or, if they are characterized
as notional principal contracts, payments received on
those bonds, will not be considered "interest on
obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the
Internal Revenue Code; and
- those bonds will not be "qualified mortgages" within
the meaning of Section 860(G)(a)(3) of the Internal
Revenue Code.
TAXATION OF HOLDERS OF ISSUER INDEBTEDNESS.
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INTEREST AND ORIGINAL ISSUE DISCOUNT. Offered bonds that are
characterized as indebtedness of the related issuer may be issued with "original
issue discount" within the meaning of Section 1273(a) of the Internal Revenue
Code. If so, you will be taxed with respect to the bond similarly to how you
would be taxed with respect to REMIC regular bonds. See "--REMICs--Taxation of
Owners of REMIC Regular Bonds--Original Issue Discount."
The Internal Revenue Code requires, in computing the accrual
of original issue discount on offered bonds, that a reasonable prepayment
assumption be used concerning the rate at which borrowers will prepay the
mortgage loans securing or supporting those bonds. Further, adjustments must be
made in the accrual of that original issue discount to reflect differences
between the prepayment rate actually experienced and the assumed prepayment
rate. The prepayment assumption is to be determined in a manner prescribed in
Treasury regulations that the Treasury Department has not yet issued. The
Committee Report indicates that the regulation should provide that the
prepayment assumption is determined once, at initial issuance, and must be the
same as that used in pricing. The prepayment assumption used in reporting
original issue discount for each series of offered bonds that do not contemplate
the substitution, acquisition and release of mortgage collateral, and the
consequent changes in the composition of the collateral over time, will be
consistent with this standard and will be disclosed in the related prospectus
supplement. However, neither we nor any other person will make any
representation that the mortgage loans will in fact prepay at a rate conforming
to the prepayment assumption or at any other rate, or that the IRS will not
challenge on audit the prepayment assumption used.
Neither regulations nor the Committee Report adequately
address securities whose interest rates, average lives and anticipated
prepayments may change as a result of the substitution, acquisition or release
of collateral, as may be the case with some series of offered bonds. However,
each issuer will determine the accrual of original issue discount with respect
to any series on its own tax returns, and will cause federal income tax
information reporting with respect to any original issue discount, to be
computed in accordance with the principles of Section 1272(a)(6) of the Internal
Revenue Code, as amplified by the Committee Report. The precise method of that
accrual will depend on the characteristics of the mortgage loan collateral, the
criteria for substitution, acquisition or release of the mortgage loan
collateral and the terms of the particular series of offered bonds, and will be
described in the related prospectus supplement.
MARKET DISCOUNT. An offered bond that is characterized as
indebtedness of the related issuer may be purchased with market discount. You
will be considered to have purchased an offered bond at a market discount, if--
- in the case of a bond issued without original issue
discount, you purchased the bond at a purchase price
less than its remaining stated principal amount, or
- in the case of a bond issued with original issue
discount, you purchased the bond at a purchase price
less than its adjusted issue price.
If you purchase an offered bond with more than a DE MINIMIS amount of market
discount, you will recognize gain upon receipt of each payment representing
stated redemption price. In particular, under Section 1276 of the Internal
Revenue Code, you generally will be required to allocate the portion of each
payment representing some or all of the stated redemption price first to accrued
market discount not previously included in income. You must recognize ordinary
income to that extent. You may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, this election will apply to all market
discount bonds acquired by you on or after the first day of the first taxable
year to which this election applies.
Treasury regulations also permit you to elect to accrue all
interest and discount, including DE MINIMIS market or original issue discount,
in income as interest, and to amortize premium, based on a constant yield
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method. If you make this election with respect to an offered bond with market
discount, you would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that you acquire during the taxable year of the election or
thereafter, and possibly previously acquired instruments. Similarly, if you make
this election for an offered bond that is acquired at a premium, you would be
deemed to have made an election to amortize bond premium with respect to all
debt instruments having amortizable bond premium that you own or acquire. See
"--Debt and Notional Principal Contracts--Taxation of Holders of Issuer
Indebtedness--Premium" below.
Each of the elections described above to accrue interest and
discount, and to amortize premium, with respect to an offered bond on a constant
yield method or as interest would be irrevocable, except with the approval of
the IRS.
However, market discount with respect to an offered bond will
be considered to be DE MINIMIS for purposes of Section 1276 of the Internal
Revenue Code if --
- the market discount is less than 0.25% of the
remaining stated redemption price of the bond
multiplied by the number of complete years to
maturity remaining after the date of its purchase.
In interpreting a similar rule with respect to original issue
discount on obligations payable in installments, the Treasury regulations refer
to the weighted average maturity of obligations. It is likely that the same rule
will be applied with respect to market discount, presumably taking into account
the prepayment assumption. If market discount is treated as DE MINIMIS under
this rule, it appears that the actual discount would be treated in a manner
similar to original issue discount of a DE MINIMIS amount. See "--Debt and
Notional Principal Contracts--Taxation of Holders of Issuer
Indebtedness--Interest and Original Issue Discount" above. That treatment would
result in discount being included in income at a slower rate than discount would
be required to be included in income using the method described above.
Section 1276(b)(3) of the Internal Revenue Code specifically
authorizes the Treasury Department to issue regulations providing for the method
for accruing market discount on debt instruments, the principal of which is
payable in more than one installment. Until regulations are issued by the
Treasury Department, the relevant rules described in the Committee Report apply.
The Committee Report indicates that, in each accrual period, you may accrue
market discount on an offered bond held by you, at your option:
- on the basis of a constant yield method,
- in the case of a bond issued without original issue
discount, in an amount that bears the same ratio to
the total remaining market discount as the stated
interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid
on the bond as of the beginning of the accrual
period, or
- in the case of a bond issued with original issue
discount, in an amount that bears the same ratio to
the total remaining market discount as the original
issue discount accrued in the accrual period bears to
the total amount of original issue discount remaining
on the offered bond at the beginning of the accrual
period.
The prepayment assumption that would be used in calculating the accrual of
original issue discount is also used in calculating the accrual of market
discount.
To the extent that the your offered bonds provide for monthly
or other periodic payments throughout their term, the effect of these rules may
be to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which that discount would accrue if it
were original issue discount.
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Moreover, in any event you generally will be required to treat a portion of any
gain on the sale or exchange of the bond as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, Section 1277 of the Internal Revenue Code may require
you to defer a portion of your interest deductions for the taxable year
attributable to any indebtedness incurred or continued to purchase or carry an
offered bond purchased with market discount. For these purposes, the DE MINIMIS
rule referred to under this "--Market Discount" subsection above applies. Any
deferred interest expense would not exceed the market discount that accrues
during the related taxable year and is, in general, allowed as a deduction not
later than the year in which the related market discount is includible in
income. If you have elected, however, to include market discount in income
currently as it accrues on all market discount instruments acquired by you in
that taxable year or thereafter, the interest deferral rule described above
will not apply.
PREMIUM. An offered bond that is characterized as indebtedness
of the related issuer, may be purchased at a premium. An offered bond purchased
at a cost, excluding any portion of the cost attributable to accrued qualified
stated interest, greater than its remaining stated redemption price will be
considered to be purchased at a premium. You may elect under Section 171 of the
Internal Revenue Code to amortize that premium under the constant yield method
over the remaining term of the bond. If made, this election will apply to all
debt instruments having amortizable bond premium that you own or subsequently
acquire. You should treat amortizable premium as an offset to interest income on
the related bond, rather than as a separate interest deduction. The Treasury
regulations also permit you to elect to include all interest, discount and
premium in income based on a constant yield method, further treating you as
having made the election to amortize premium generally. See "--Debt and Notional
Principal Contracts--Taxation of Holders of Issuer Indebtedness--Market
Discount" above.
The Committee Report states that the same rules that apply to
accrual of market discount and requires the use of a prepayment assumption in
accruing market discount with respect to the offered bonds without regard to
whether those bonds have original issue discount, will also apply in amortizing
bond premium under Section 171 of the Internal Revenue Code.
REALIZED LOSSES. Under Section 166 of the Internal Revenue
Code, if you are a corporate holder of an offered bond that is characterized as
indebtedness of the related issuer, or if you are a noncorporate holder of that
bond and you acquired the bond in connection with a trade or business, you
should be allowed to deduct, as ordinary losses, any losses sustained during a
taxable year in which your offered bond becomes wholly or partially worthless as
the result of one or more realized losses on the related mortgage loans.
However, if you are a noncorporate holder and you did not acquire the bond in
connection with a trade or business, it appears that--
- you will not be entitled to deduct a loss under the
Internal Revenue Code until your offered bond becomes
wholly worthless, and
- the loss will be characterized as a short-term
capital loss.
You must accrue interest and original issue discount with
respect to your offered bond, without giving effect to any reductions in
payments attributable to defaults or delinquencies on the related mortgage
loans, until it can be established that any reduction ultimately will not be
recoverable. As a result, the amount of taxable income you report in any period
could exceed the amount of economic income actually realized by you in that
period. You should be able to recognize a loss or reduction in income
attributable to previously accrued and included income that, as the result of a
realized loss, ultimately will not be realized. However, the law is unclear with
respect to the timing and character of this loss or reduction in income.
TAXATION OF HOLDERS OF NOTIONAL PRINCIPAL CONTRACTS. A
notional principal contract is defined for federal income tax purposes as a
financial instrument that provides for the payments of amounts by one party to
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another at specified intervals calculated by reference to a specified index
applied to a notional principal amount in exchange for either:
- a promise to pay similar amounts, or
- specified consideration such as, for example, a cash
payment made at the time that the contract is entered
into.
All notional principal contracts offered hereunder will be issued in exchange
for cash.
There are two types of payments with respect to notional
principal contracts under the regulations promulgated under the Section 446
regulations, periodic payments and non-periodic payments. Periodic payments
will include any payments that are based on an interest rate applied to a
notional principal amount that are made by the issuer to you at intervals of
one year or less throughout the term of the notional principal contract. Your
payment to the issuer for the notional principal contract at the time of its
issuance, sometimes referred to as an upfront payment, will be treated as a
non-periodic payment.
Under the Section 446 Regulations, periodic payments should be
included in your income as ordinary income at the times they accrue, regardless
of your regular method of accounting for federal income tax purposes. Under the
Section 446 Regulations, you should be able to deduct against that income an
allocable portion of the non-periodic payment you made to the issuer at the time
the notional principal contract was issued to you. Generally, the manner in
which deductions are claimed with respect to a non-periodic payment must reflect
the economic substance of the notional principal contract.
The notional principal contracts offered under this prospectus
will have notional principal amounts based on the underlying mortgage loans and
related assets of the issuer or on the principal amounts of one or more classes
of bonds of the same series. The amount and timing of payments on those notional
principal contracts will accordingly depend on the rate at which the mortgage
loans and related assets of the issuer are repaid or retired, either directly or
as a result of principal payments being made on the relevant bonds of the same
series due to those repayments or retirements. That is, any offered notional
principal contract will have characteristics similar or identical to those of
instruments that are covered by Section 1272(a)(6) of the Internal Revenue Code.
The rules under Section 1272(a)(6) of the Internal Revenue Code are thought to
reflect the economic substance of those instruments.
The Section 446 Regulations are not clear as to the reporting
of net income or expense with respect to offered notional principal contracts.
For federal income tax information reporting purposes, and for purposes of its
own tax returns, in the absence of further legislative, administrative or
judicial clarification to the contrary and unless otherwise disclosed in the
related prospectus supplement, each issuer will report net income or loss with
respect to notional principal contracts based on the same rules that apply with
respect to REMIC regular bonds that have no, or a nominal, principal amount. One
consequence of doing so may be that any net loss with respect to a notional
principal contract might not be able to be recognized currently but rather must
be used to offset future net income, if any, with respect to that notional
principal contract. See the last paragraph of "--REMICs--Taxation of Owners of
REMIC Regular Bonds--Original Issue Discount."
There is no assurance that the IRS will agree with the method
proposed to be used for federal income tax information reporting purposes by
issuers of notional principal contracts. In the event any challenge to that
method by the IRS were successful, it could be applied with retroactive effect
and could be detrimental to you if an alternative method accelerated the
recognition of taxable income, or deferred the recognition of losses,
attributable to an offered notional principal contract.
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SALES OF BONDS CHARACTERIZED AS INDEBTEDNESS OF, OR NOTIONAL
PRINCIPAL CONTRACTS ISSUED BY, THE RELATED ISSUER. If you sell a bond that is
characterized as indebtedness of, or a notional principal contract issued by the
related issuer, you will recognize gain or loss equal to the difference between
the amount realized on the sale and your adjusted basis in the bond. Your
adjusted basis in the bond generally will equal--
- the cost of the bond to you, increased by
- income reported by you with respect to the bond,
including original issue discount and market discount
income, and reduced, but not below zero, by
- any amortized premium or non-periodic payment on the
bond, characterized as a notional principal contract,
and any payments on the bond received by you.
Except as described below in this "--Sales of Bonds Characterized as
Indebtedness of, or Notional Principal Contracts Issued by, the Related Issuer"
subsection, any gain or loss from your sale of that bond will be capital gain or
loss, provided you hold the bond as a capital asset within the meaning of
Section 1221 of the Internal Revenue Code, which is generally property held for
investment.
As of the date of this prospectus, the Internal Revenue Code
provides for lower rates as to long-term capital gains than those applicable to
the short-term capital gains and ordinary income realized or received by
individuals. No similar rate differential exists for corporations. In addition,
the distinction between a capital gain or loss and ordinary income or loss
remains relevant for other purposes.
If you purchase an offered bond at a market discount, gain
recognized on your sale of that bond will be taxable as ordinary income in an
amount not exceeding the portion of that discount that accrued during the period
that the bond was held by you, reduced by any market discount included in income
under the rules described above under "--Debt and Notional Principal
Contracts--Taxation of Holders of Issuer Indebtedness--Market Discount" and
"--Debt and Notional Principal Contracts--Taxation of Holders of Issuer
Indebtedness--Premium."
Gain from the sale of an offered bond that might otherwise be
capital gain may be treated as ordinary income to the extent that the bond is
held as part of a "conversion transaction" within the meaning of Section 1258 of
the Internal Revenue Code. A conversion transaction generally is one in which
the taxpayer has taken two or more positions in the same or similar property
that reduce or eliminate market risk, if substantially all of the taxpayer's
return is attributable to the time value of the taxpayer's net investment in the
transaction. The amount of gain realized in a conversion transaction that is
recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment at 120% of the
appropriate applicable Federal rate at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a you may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include that
net capital gain in total net investment income for the relevant taxable year.
This election would be done for purposes of the rule that limits the deduction
of interest on indebtedness incurred to purchase or carry property held for
investment to your net investment income.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Payments of
interest and principal, as well as payments of proceeds from the sale of,
offered bonds that are characterized as indebtedness of, or notional principal
contracts issued by, the related issuer, may be subject to the "backup
withholding tax" under Section 3406 of the Internal Revenue Code at a rate of
31% if recipients of those payments--
- fail to furnish to the payor taxpayer identification
number in the manner required, or
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- otherwise fail to establish an exemption from that
tax.
Backup withholding is not an additional tax. Rather, any
amounts withheld from a payment to a recipient under the backup withholding
rules are allowed as a refund or credit against the recipient's U.S. Federal
Income tax, provided that the required information is furnished to the IRS.
Furthermore, some penalties may be imposed by the IRS on a recipient of payments
that is required to supply information but that does not do so in the proper
manner.
The related bond trustee, the related tax administrator or
another specified party on behalf of the related issuer will report to
bondholders and to the IRS for each calendar year the amount of any "reportable
payments" during that year and the amount of tax withheld, if any, with respect
to payments on the offered bonds.
TAX TREATMENT OF FOREIGN INVESTORS. If an offered bond is
characterized as indebtedness of related issuer, then interest paid on that bond
to a nonresident alien individual, foreign partnership or foreign corporation
that has no connection with the United States other than holding bonds will
normally qualify as portfolio interest and will be exempt from federal income
tax, except where:
- the recipient is a holder, directly or by
attribution, of 10% or more of the capital or profits
interest in us or the related issuer or, possibly, in
a borrower on a related mortgage loan, or
- the recipient is a controlled foreign corporation to
which we or the related issuer or, possibly, a
borrower on a related mortgage loan is a related
person.
Upon receipt of appropriate ownership statements, the related
issuer and bond trustee normally will be relieved of obligations to withhold tax
from interest payments. These provisions supersede the generally applicable
provisions of United States law that would otherwise require the related issuer
or bond trustee to withhold at a 30% rate, unless that rate were reduced or
eliminated by an applicable tax treaty, on, among other things, interest and
other fixed or determinable, annual or periodic income paid to nonresidents.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described
in "Federal Income Tax Consequences," potential investors should consider the
state and local tax consequences concerning the offered bonds. State tax law may
differ substantially from the corresponding federal law, and the discussion
above does not purport to describe any aspect of the tax laws of any state or
other jurisdiction. Therefore, we recommend that prospective investors consult
their tax advisors with respect to the various tax consequences of investments
in the offered bonds.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as
amended, and the Internal Revenue Code of 1986 impose various requirements on--
- ERISA Plans, and
- persons that are fiduciaries with respect to ERISA
Plans,
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in connection with the investment of the assets of an ERISA Plan. For purposes
of this discussion, ERISA Plans may include individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts,
including as applicable, insurance company general accounts, in which other
ERISA Plans are invested.
Governmental plans and, if they have not made an election
under Section 410(d) of the Internal Revenue Code of 1986, church plans are not
subject to ERISA requirements. Accordingly, assets of those plans may be
invested in the offered bonds without regard to the ERISA considerations
described below in this "ERISA Considerations" section, subject to the
provisions of other applicable federal and state law. Any of those plans which
is qualified and exempt from taxation under Sections 401(a) and 501(a) of the
Internal Revenue Code of 1986, however, is subject to the prohibited transaction
rules in Section 503 of that Code.
ERISA imposes general fiduciary requirements on a fiduciary
that is investing the assets of an ERISA Plan, including--
- investment prudence and diversification, and
- compliance with the investing ERISA Plan's governing
the documents.
Section 406 of ERISA and Section 4975 of the Internal Revenue
Code of 1986 also prohibit a broad range of transactions involving the assets of
an ERISA Plan and a Party in Interest with respect to that ERISA Plan, unless a
statutory or administrative exemption exists.
The types of transactions between ERISA Plans and Parties in
Interest that are prohibited include:
- sales, exchanges or leases of property;
- loans or other extensions of credit; and
- the furnishing of goods and services.
Parties in Interest that participate in a prohibited
transaction may be subject to an excise tax imposed under Section 4975 of the
Internal Revenue Code of 1986 or a penalty imposed under Section 502(i) of
ERISA, unless a statutory or administrative exemption is available. In addition,
the persons involved in the prohibited transaction may have to cancel the
transaction and pay an amount to the affected ERISA Plan for any losses realized
by that ERISA Plan or profits realized by those persons. In addition, individual
retirement accounts involved in the prohibited transaction may be disqualified
which would result in adverse tax consequences to the owner of the account.
PLAN ASSET REGULATIONS
An ERISA Plan's investment in offered bonds may cause the
related mortgage collateral and other assets of the related trust estate to be
deemed assets of that ERISA Plan if those bonds are characterized as equity
for purposes of the Plan Asset Regulations. Section 2510.3-101 of the Plan Asset
Regulations provides that when an ERISA Plan acquires an equity interest in an
entity, the assets that ERISA Plan or arrangement include both that equity
interest and an undivided interest in each of the underlying assets of the
entity, unless an exception applies. One exemption is that the equity
participation in the entity by benefit plan investors, which include both ERISA
Plans and some employee benefit plans not subject to ERISA, is not significant.
The equity participation by benefit plan investors will be significant on any
date if 25% or more of the value of any class of
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equity interests in the entity is held by benefit plan investors. The percentage
owned by benefit plan investors is determined by excluding the investments of
the following persons:
1. those with discretionary authority or
control over the assets of the entity,
2. those who provide investment advice directly
or indirectly for a fee with respect to the
assets of the entity, and
3. those who are affiliates of the persons
described in the preceding clauses 1. and 2.
In the case of offered bonds characterized as equity for purposes of the Plan
Asset Regulations, investments by the related issuer, bond trustee, master
servicer or special servicer, by any other party with discretionary authority
over the assets of the related trust estate, or by the affiliates of those
persons, will be excluded.
If a class of offered bonds is characterized as debt rather
than equity for purposes of the Plan Asset Regulations, then the assets of the
related trust estate would not be treated as assets of ERISA Plans that directly
or indirectly purchase those bonds, solely on account of that purchase. In order
to be characterized as debt for purposes of the Plan Asset Regulations, an
offered bond--
- must constitute debt under applicable state law,
and
- must not have any substantial equity features.
A fiduciary of an investing ERISA Plan is any person who--
- has discretionary authority or control over the
management or disposition of the assets of that ERISA
Plan, or
- provides investment advice with respect to the assets
of that ERISA Plan for a fee.
If the mortgage collateral and other assets included in the trust estate for a
series of offered bonds are ERISA Plan assets, then any party exercising
management or discretionary control regarding those assets, such as the related
bond trustee, master servicer or special servicer, or affiliates of any of these
parties, may be --
- deemed to be a fiduciary with respect to the
investing ERISA Plan, and
- subject to the fiduciary responsibility provisions of
ERISA.
In addition, if the mortgage collateral and other assets included in the trust
estate for a series of offered bonds are ERISA Plan assets, then the operation
of that trust estate may involve prohibited transactions under ERISA or the
Internal Revenue Code of 1986. For example, if a borrower under a mortgage loan
in that trust estate is a Party in Interest to an investing ERISA Plan, then the
purchase by that ERISA Plan of offered bonds characterized as "equity" in that
trust estate, could be a prohibited loan between that ERISA Plan and the Party
in Interest.
The Plan Asset Regulations provide that where an ERISA Plan
purchases a "guaranteed governmental mortgage pool certificate," the assets of
that ERISA Plan include the certificate but do not include any of the mortgages
underlying the certificate. The Plan Asset Regulations include in the definition
of a "guaranteed governmental mortgage pool certificate" some certificates
issued and/or guaranteed by Freddie Mac, Ginnie Mae and Fannie Mae, but do not
include certificates issued or guaranteed by Farmer Mac. Accordingly, even if
these types of mortgaged-backed securities,
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other than the Farmer Mac certificates, were deemed to be assets of an ERISA
Plan, the underlying mortgages would not be treated as assets of that ERISA
Plan. Private label mortgage participations, mortgage pass-through certificates,
Farmer Mac certificates or other mortgage-backed securities are not "guaranteed
governmental mortgage pool certificates" within the meaning of the Plan Asset
Regulations.
In addition, the acquisition or holding of offered bonds by or
on behalf of an ERISA Plan could give rise to a prohibited transaction if we or
the related bond trustee, master servicer or special servicer or any related
underwriter, sub-servicer, tax administrator, manager, borrower or obligor under
any credit enhancement mechanism, or one of their affiliates, is or becomes a
Party in Interest with respect to an investing ERISA Plan.
If you are a fiduciary of an ERISA Plan, you should consult
your counsel and review the ERISA discussion in the related prospectus
supplement before purchasing any offered bonds.
PROHIBITED TRANSACTION EXEMPTIONS
If you are a fiduciary of an ERISA Plan, then, in connection
with your deciding whether to purchase any of the offered bonds on behalf of an
ERISA Plan, you should consider the availability of one of the following
prohibited transaction class exemptions issued by the U.S. Department of Labor:
- Prohibited Transaction Class Exemption 75-1, which
exempts particular transactions involving ERISA Plans
and broker-dealers, reporting dealers and banks;
- Prohibited Transaction Class Exemption 90-1, which
exempts particular transactions between insurance
company separate accounts and Parties in Interest;
- Prohibited Transaction Class Exemption 91-38, which
exempts particular transactions between bank
collective investment funds and Parties in Interest;
- Prohibited Transaction Class Exemption 84-14, which
exempts particular transactions effected on behalf
of an ERISA Plan by a "qualified professional asset
manager;"
- Prohibited Transaction Class Exemption 95-60, which
exempts particular transactions between insurance
company general accounts and Parties in Interest; and
- Prohibited Transaction Class Exemption 96-23, which
exempts particular transactions effected on behalf
of an ERISA Plan by an "in-house asset manager."
We cannot provide any assurance that any of these class
exemptions will apply with respect to any particular investment by or on behalf
of an ERISA Plan in any class of offered bonds. Furthermore, even if any of them
were deemed to apply, that particular class exemption may not apply to all
transactions that could occur in connection with the investment. The prospectus
supplement with respect to the offered bonds of any series may contain
additional information regarding the availability of other exemptions, with
respect to those bonds.
UNDERWRITER'S EXEMPTION
It is expected that Lehman Brothers Inc. will be the sole,
lead or co-lead underwriter in each underwritten offering of bonds made by this
prospectus. The U.S. Department of Labor issued
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Prohibited Transaction Exemption 91-14 to a predecessor in interest to Lehman
Brothers Inc. Subject to the satisfaction of the conditions specified in that
exemption, PTE 91-14, as amended, including by PTE 97-34, generally exempts
from the application of the prohibited transaction provisions of ERISA and
the Internal Revenue Code of 1986, particular transactions relating to, among
other things--
- the servicing and operation of some mortgage asset
pools, and
- the purchase, sale and holding of some securities
evidencing interests in those pools that are
underwritten by Lehman Brothers Inc. or any person
affiliated with Lehman Brothers Inc.
PTE 91-14 applies only to offered bonds that are equity
interests or are debt issued by a REMIC or FASIT. The related prospectus
supplement will state whether PTE 91-14 is or may be available with respect to
any offered bonds underwritten by Lehman Brothers Inc.
INSURANCE COMPANY GENERAL ACCOUNTS
The Small Business Job Protection Act of 1996 added a new
Section 401(c) to ERISA, which provides relief from the fiduciary and prohibited
transaction provisions of ERISA and the Internal Revenue Code of 1986 for
transactions involving an insurance company general account. This exemption is
in addition to any exemption that may be available under prohibited transaction
class exemption 95-60 for the purchase and holding of offered bonds by an
insurance company general account.
Under Section 401(c) of ERISA, the U.S. Department of Labor
issued a final regulation on January 5, 2000, providing guidance for
determining, in cases where insurance policies supported by an insurer's general
account are issued to or for the benefit of an ERISA Plan on or before December
31, 1998, which general account assets are ERISA Plan assets. That regulation
generally provides that, if the specified requirements are satisfied with
respect to insurance policies issued on or before December 31, 1998, the assets
of an insurance company general account will not be ERISA Plan assets.
Any assets of an insurance company general account which
support insurance policies issued to an ERISA Plan after December 31, 1998, or
issued to an ERISA Plan on or before December 31, 1998 for which the insurance
company does not comply with the requirements set forth in the final regulation
under Section 401(c) of ERISA, may be treated as ERISA Plan assets. In addition,
because Section 401(c) of ERISA and the regulation issued under Section 401(c)
of ERISA do not relate to insurance company separate accounts, separate account
assets are still treated as ERISA Plan assets, invested in the separate account.
If you are an insurance company are contemplating the investment of general
account assets in offered bonds, you should consult your legal counsel as to the
applicability of Section 401(c) of ERISA.
CONSULTATION WITH COUNSEL
If you are a fiduciary for an ERISA Plan and you intend to
purchase offered bonds on behalf of or with assets of an ERISA Plan, you
should:
- consider your general fiduciary obligations under
ERISA, and
- consult with your legal counsel as to--
1. the potential applicability of ERISA and the
Internal Revenue Code of 1986 to that
investment, and
2. the availability of any prohibited
transaction exemption in connection with that
investment.
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TAX EXEMPT INVESTORS
An ERISA Plan that is exempt from federal income taxation
under Section 501 of the Internal Revenue Code of 1986 will be subject to
federal income taxation to the extent that its income is "unrelated business
taxable income" within the meaning of Section 512 of the Internal Revenue Code
of 1986. All excess inclusions of a REMIC allocated to a REMIC residual bond
held by a tax-exempt ERISA Plan will be considered unrelated business taxable
income and will be subject to federal income tax.
See "Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Residual Bonds--Excess Inclusions" in this prospectus.
LEGAL INVESTMENT
If and to the extent specified in the related prospectus
supplement, the offered bonds of any series may constitute mortgage related
securities for purposes of the Secondary Mortgage Market Enhancement Act of
1984. Mortgage related securities are legal investments for entities--
- that are created or existing under the laws of the
United States or any state, including the District of
Columbia and Puerto Rico, and
- whose authorized investments are subject to state
regulations,
to the same extent that, under applicable law, obligations issued by or
guaranteed as to principal and interest by the United States or any of its
agencies or instrumentalities are legal investments for those entities.
Prior to December 31, 1996, classes of offered bonds would be
mortgage related securities for purposes of SMMEA only if they:
- were rated in one of the two highest rating
categories by at least one nationally recognized
statistical rating organization; and
- were secured by, and by their terms provided for
payments of principal in relation to payments, or
reasonable projections of payments, on, loans
directly secured by a first lien on a single parcel
of real estate upon which is located a dwelling or
mixed residential and commercial structure, which
loans had been originated by the types of originators
specified in SMMEA.
Further, under SMMEA as originally enacted, if a state enacted
legislation on or before October 3, 1991 that specifically limited the legal
investment authority of any entities referred to in the preceding paragraph with
respect to mortgage related securities under that definition, offered bonds
would constitute legal investments for entities subject to the legislation only
to the extent provided in that legislation.
Effective December 31, 1996, the definition of "mortgage
related securities" was modified to include among the types of loans to which
the securities may relate, loans secured by "one or more parcels of real estate
upon which is located one or more commercial structures." In addition, the
related legislative history states that this expanded definition includes
multifamily loans secured by more than one parcel of real estate upon which is
located more than one structure. Until September 23, 2001, any state may enact
legislation limiting the extent to which mortgage related securities under this
expanded definition would constitute legal investments under that state's laws.
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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 by
those securities; and
- federal credit unions may invest in mortgage related
securities and national banks may purchase mortgage
related securities for their own account without
regard to the limitations generally applicable to
investment securities prescribed in 12 U.S.C. 24
(Seventh),
subject in each case to the regulations that the applicable federal regulatory
authority may prescribe.
Effective December 31, 1996, the OCC amended 12 C.F.R. Part 1
to authorize national banks to purchase and sell for their own account, without
limitation as to a percentage of the bank's capital and surplus, but subject to
compliance with selected general standards concerning "safety and soundness" and
retention of credit information in 12 C.F.R. Section 1.5, selected Type IV
securities, which are defined in 12 C.F.R. Section 1.2(1) to include some
commercial mortgage-related securities and residential mortgage-related
securities. As defined, "commercial mortgage-related security" and "residential
mortgage-related security" mean, in relevant part, a mortgage related security
within the meaning of SMMEA, provided that, in the case of a commercial
mortgage-related security, it "represents ownership of a promissory note or
certificate of interest or participation that is directly secured by a first
lien on one or more parcels of real estate upon which one or more commercial
structures are located and that is fully secured by interests in a pool of loans
to numerous obligors." In the absence of any rule or administrative
interpretation by the OCC defining the term "numerous obligors," we make no
representation as to whether any class of offered bonds will qualify as
commercial mortgage-related securities, and thus as Type IV securities, for
investment by national banks.
The NCUA has adopted rules, codified at 12 C.F.R. Part 703,
which permit federal credit unions to invest in mortgage related securities
under some limited circumstances, other than stripped mortgage related
securities, residual interests in mortgage related securities and commercial
mortgage related securities, unless the credit union has obtained written
approval from the NCUA to participate in the investment pilot program described
in 12 C.F.R. Section 703.140.
The OTS has issued Thrift Bulletin 13a (December 1, 1998),
"Management of Interest Rate Risk, Investment Securities, and Derivatives
Activities," which thrift institutions subject to the jurisdiction of the OTS
should consider before investing in any of the offered bonds.
All depository institutions considering an investment in the
offered bonds should review the Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities of the Federal Financial
Institutions Examination Council, which has been adopted by the Board of
Governors of the Federal Reserve System, the FDIC, the OCC and the OTS effective
May 26, 1998, and by the NCUA effective October 1, 1998. That statement sets
forth general guidelines which depository institutions must follow in managing
risks, including market, credit, liquidity, operational (transaction), and legal
risks, applicable to all securities, including mortgage pass-through securities
and mortgage-derivative products used for investment purposes.
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There may be other restrictions on your ability either to
purchase one or more classes of offered bonds of any series or to purchase
offered bonds representing more than a specified percentage of your assets. We
make no representations as to the proper characterization of any class of
offered bonds for legal investment or other purposes. Also, we make no
representations as to the ability of particular investors to purchase any class
of offered bonds under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of offered bonds.
Accordingly, if your investment activities are subject to legal investment laws
and regulations, regulatory capital requirements or review by regulatory
authorities, you should consult with your legal advisor in determining whether
and to what extent--
- the offered bonds of any class and series constitute
legal investments or are subject to investment,
capital or other restrictions; and
- if applicable, SMMEA has been overridden in your
State.
USE OF PROCEEDS
Unless otherwise specified in the related prospectus
supplement, the net proceeds to be received from the sale of the offered bonds
of any series will be applied by us to the purchase of the related mortgage
collateral or will be used by us to cover expenses related to that purchase and
the issuance of those bonds. We expect to sell the offered bonds from time to
time, but the timing and amount of offerings of those bonds will depend on a
number of factors, including the volume of mortgage assets acquired by us,
prevailing interest rates, availability of funds and general market conditions.
METHOD OF DISTRIBUTION
The bonds offered by this prospectus and the related
prospectus supplements will be offered in series through one or more of the
methods described in the next paragraph. The prospectus supplement prepared for
the offered bonds of each series will describe the method of offering being
utilized for those bonds and will state the net proceeds to us from the sale of
those bonds.
We intend that offered bonds will be offered through the
following methods from time to time. We further intend that offerings may be
made concurrently through more than one of these methods or that an offering of
the offered bonds of a particular series may be made through a combination of
two or more of these methods. The methods are as follows:
1. by negotiated firm commitment or best efforts
underwriting and public offering by one or more
underwriters specified in the related prospectus
supplement;
2. by placements by us with institutional investors
through dealers; and
3. by direct placements by us with institutional
investors.
In addition, if specified in the related prospectus supplement, the offered
bonds of a series may be offered in whole or in part to the seller of the
mortgage assets that would back those bonds. Furthermore, the related trust
estate for any series of offered bonds may include other securities, the
offering of which was registered under the registration statement of which this
prospectus is a part.
If underwriters are used in a sale of any offered bonds, other
than in connection with an underwriting on a best efforts basis, the offered
bonds will be acquired by the underwriters for their own account. These bonds
may be resold from time to time in one or more transactions, including
negotiated transactions, at fixed public offering prices or at varying prices to
be determined at the time of sale or at the time of commitment therefor. The
managing underwriter or underwriters with respect to the offer and sale of
offered bonds of a particular series
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will be described on the cover of the prospectus supplement relating to the
series and the members of the underwriting syndicate, if any, will be named in
the relevant prospectus supplement.
Underwriters may receive compensation from us or from
purchasers of the offered bonds in the form of discounts, concessions or
commissions. Underwriters and dealers participating in the payment of the
offered bonds may be deemed to be underwriters in connection with those bonds.
In addition, any discounts or commissions received by them from us and any
profit on the resale of those offered bonds by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933, as
amended.
It is anticipated that the underwriting agreement pertaining
to the sale of the offered bonds of any series will provide that--
- the obligations of the underwriters will be subject
to some conditions precedent,
- the underwriters will be obligated to purchase all
the bonds if any are purchased, other than in
connection with an underwriting on a best efforts
basis, and
- in limited circumstances, we will indemnify the
several underwriters and the underwriters will
indemnify us against civil liabilities, to disclosure
in our registration statement, this prospectus or any
of the related prospectus supplements, including
liabilities under the Securities Act of 1933, as
amended, or will contribute to payments required to
be made with respect to any liabilities.
The prospectus supplement with respect to any series offered
by placements through dealers will contain information regarding the nature of
the offering and any agreements to be entered into between us and purchasers of
offered bonds of that series.
We anticipate that the offered bonds will be sold primarily to
institutional investors. Purchasers of offered bonds, including dealers, may,
depending on the facts and circumstances of the purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended, in
connection with reoffers and sales by them of offered bonds. Holders of offered
bonds should consult with their legal advisors in this regard prior to any
reoffer or sale.
LEGAL MATTERS
Unless otherwise specified in the related prospectus
supplement, particular legal matters in connection with the bonds of each
series, including some federal income tax consequences, will be passed upon
for us by--
- Sidley & Austin;
- Cadwalader, Wickersham & Taft;
- Skadden, Arps, Slate, Meagher & Flom; or
- Thacher, Proffitt & Wood.
FINANCIAL INFORMATION
A new owner trust may be formed with respect to each series of
offered bonds. None of those owner trusts will engage in any business activities
or have any assets or obligations other than in connection with the issuance of
the related series of offered bonds. Accordingly, no financial statements with
respect to any owner trust will be included in this prospectus or in the related
prospectus supplement. We have determined that our financial statements will not
be material to the offering of any offered bonds.
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RATING
It is a condition to the issuance of any class of offered
bonds that, at the time of issuance, at least one nationally recognized
statistical rating organization has rated those bonds in one of its generic
rating categories which signifies investment grade. Typically, the four highest
rating categories, within which there may be sub-categories or gradations
indicating relative standing, signify investment grade.
Ratings on bonds address the likelihood of receipt by the
holders of all payments of interest and/or principal to which they are entitled.
These ratings address the structural, legal and issuer-related aspects
associated with the bonds, the nature of the related mortgage collateral and the
credit quality of any third-party credit enhancer. The rating(s) on a class of
offered bonds will not represent any assessment of--
- whether the price paid for those bonds is fair;
- whether those bonds are a suitable investment for any
particular investor;
- the tax attributes of those bonds, the related issuer
or the related trust estate;
- the yield to maturity or, if they have principal
balances, the average life of those bonds;
- the likelihood or frequency of prepayments of
principal on the mortgage loans securing or
underlying the security for those bonds;
- the degree to which the amount or frequency of
prepayments on the mortgage loans securing or
underlying the security for those bonds might differ
from those originally anticipated;
- whether or to what extent the interest payable on
those bonds may be reduced in connection with
interest shortfalls resulting from the timing of
voluntary prepayments;
- the likelihood that any amounts other than interest
at the related mortgage interest rates and principal
will be received with respect to the mortgage loans
securing or underlying the security for those bonds;
or
- if those bonds provide solely or primarily for
payments of interest, whether the holders, despite
receiving all payments of interest to which they are
entitled, would ultimately recover their initial
investments in those bonds.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
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GLOSSARY
The following capitalized terms will have the respective
meanings assigned to them in this "Glossary" section whenever they are used in
this prospectus.
"ADA" means the Americans with Disabilities Act of 1990, as
amended.
"CERCLA" means the federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended.
"COMMITTEE REPORT" means the Conference Committee Report
accompanying the Tax Reform Act of 1986.
"CPR" means an assumed constant rate of prepayment each
month, which is expressed on a per annum basis, relative to the then
outstanding principal balance of a pool of mortgage loans for the life of
those loans.
"DISQUALIFIED ORGANIZATION" means:
- the United States,
- any State or political subdivision of the United
States,
- any foreign government,
- any international organization,
- any agency or instrumentality of the foregoing,
except for instrumentalities described in Section
168(h)(2)(D) of the Internal Revenue Code or the
Freddie Mac,
- any organization, other than a cooperative described
in Section 521 of the Internal Revenue Code, that is
exempt from federal income tax, except if it is
subject to the tax imposed by Section 511 of the
Internal Revenue Code, or
- any organization described in Section 1381(a)(2)(C)
of the Internal Revenue Code.
"ECS" means Euroclear Clearance System, S.C., a Belgian
cooperative corporation.
"ELECTING LARGE PARTNERSHIP" means any partnership having more
than 100 members during the preceding tax year which elects to apply simplified
reporting provisions under the Internal Revenue Code of 1986, except for some
service partnerships and commodity pools.
"ERISA PLAN" means any employee benefit plan, or other
retirement plan, arrangement or account, that is subject to the fiduciary
responsibility provisions of the Employee Retirement Income Security Act of
1974, as amended, and Section 4975 of the Internal Revenue Code of 1986.
"EUROCLEAR OPERATOR" means Morgan Guaranty Trust Company of
New York, Brussels, Belgium office, as operator of the Euroclear System.
"EUROCLEAR TERMS AND CONDITIONS" means the Terms and
Conditions Governing Use of Euroclear and the related Operating Procedures of
the Euroclear System and, to the extent that it applies to the operation of the
Euroclear System, Belgian law.
"FANNIE MAE" means the Federal National Mortgage Association.
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"FARMER MAC" means the Federal Agricultural Mortgage
Corporation.
"FASIT" means a financial asset securitization trust,
within the meaning of, and formed in accordance with, the Small Business Job
Protection Act of 1996 and Sections 860I through 860L of the Internal Revenue
Code of 1986.
"FDIC" means the Federal Deposit Insurance Corporation.
"FINANCIAL INTERMEDIARY" means a brokerage firm, bank, thrift
institution or other financial intermediary that maintains an account of a
beneficial owner of securities.
"FREDDIE MAC" means the Federal Home Loan Mortgage
Association.
"GINNIE MAE" means the Government National Mortgage
Association.
"GOVERNING DOCUMENTS" means the deposit trust agreement, the
indenture and any servicing and administration agreement, which govern the
issuance of a series of offered bonds and various related matters.
"IRS" means the Internal Revenue Service.
"LENDER LIABILITY ACT" means the Asset Conservation Lender
Liability and Deposit Insurance Act of 1996, as amended.
"NET INCOME FROM FORECLOSURE PROPERTY" means income from
foreclosure property other than qualifying rents and other qualifying income for
a REIT.
"NCUA" means the National Credit Union Administration.
"OCC" means the Office of the Comptroller of the Currency.
"OTS" means the Office of Thrift Supervision.
"PARTY IN INTEREST" means any person that is a "party in
interest" within the meaning of ERISA or a "disqualified person" within the
meaning of the Internal Revenue Code of 1986.
"PASS-THROUGH ENTITY" means any:
- regulated investment company,
- real estate investment trust,
- trust,
- partnership, or
- specified other entities described in Section
860E(e)(6) of the Internal Revenue Code.
"PLAN ASSET REGULATIONS" means the regulations of the U.S.
Department of Labor promulgated under the Employee Retirement Income Security
Act of 1974, as amended.
"QRS" means a qualified REIT subsidiary within the meaning
of Section 856(i) of the Internal Revenue Code of 1986.
"REIT" means a real estate investment trust within the
meaning of Section 856(a) of the Internal Revenue Code of 1986.
"RELIEF ACT" means the Soldiers' and Sailors' Relief Act of
1940, as amended.
"REMIC" means a real estate mortgage investment conduit,
within the meaning of, and formed in accordance with, the Tax Reform Act of
1986 and Sections 860A through 860G of the Internal Revenue Code of 1986.
"SEC" means the Securities and Exchange Commission.
"SECTION 446 REGULATIONS" means the regulations promulgated
under Section 446 of the Internal Revenue Code.
"SPA" means standard prepayment assumption.
"TMP" means a taxable mortgage pool within the meaning of
Section 7701(i) of the Internal Revenue Code of 1986.
"UCC" means, for any jurisdiction, the Uniform Commercial Code
as in effect in that jurisdiction.
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"U.S. PERSON" means:
- a citizen or resident of the United States;
- a corporation, partnership or other entity created or
organized in, or under the laws of, the United States
or any political subdivision of the United States;
- an estate whose income from sources without the
United States is includible in gross income for
United States federal income tax purposes regardless
of its connection with the conduct of a trade or
business within the United States; or
- a trust as to which--
1. a court in the United States is able to
exercise primary supervision over the
administration of the trust, and
2. one or more United States persons have the
authority to control all substantial
decisions of the trust.
In addition, to the extent provided in the Treasury
Regulations, a trust will be a U.S. Person if it was in existence on August
20, 1996 and it elected to be treated as a U.S. Person.
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PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ____________)
LB COMMERCIAL MORTGAGE TRUST ______________,
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES ______,
CLASS A-1, CLASS A-2, CLASS B, CLASS C, CLASS D, CLASS E, CLASS F AND CLASS X
APPROXIMATE TOTAL PRINCIPAL BALANCE AT INITIAL ISSUANCE: $__________
We, Structured Asset Securities Corporation, have prepared this
prospectus supplement in order to offer the classes of commercial mortgage
pass-through certificates identified above. These certificates are the only
securities offered by this prospectus supplement. This prospectus supplement
specifically relates to, and is accompanied by, our prospectus dated
____________. We will not list the offered certificates on any national
securities exchange or any automated quotation system of any registered
securities associations, such as NASDAQ.
The offered certificates will represent interests only in the trust
identified above. They will not represent interests in or obligations of any
other party. The assets of the trust will include a pool of multifamily and
commercial mortgage loans. The initial mortgage pool balance that we expect to
transfer to the trust will be approximately $____________. No governmental
agency or instrumentality or private insurer has insured or guaranteed the
offered certificates or any of the mortgage loans that back them.
Each class of offered certificates will receive monthly
distributions of interest, principal or both, commencing in ____________.
The table on page S-_ of this prospectus supplement contains a list of the
classes of offered certificates and states the principal balance, interest
rate, and other select characteristics of each class. Credit enhancement is
being provided through the subordination of ____ non-offered classes of
series ____ certificates. That same table on page S-_ of this prospectus
supplement also contains a list of the non-offered classes of the series ____
certificates.
-------------------------
You should fully consider the risk factors beginning on page S-____ in
this prospectus supplement and on page _____ in the accompanying prospectus
prior to investing in the offered certificates.
<PAGE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus supplement or the accompanying
prospectus. Any representation to the contrary is a criminal offense.
--------------------------
Lehman Brothers Inc. is the underwriter for this offering. It
will purchase the offered certificates from us. Our proceeds from the sale of
the offered certificates will equal approximately ____% of the total initial
principal balance of the offered certificates, plus accrued interest, before
deducting expenses payable by us. The underwriter's commission will be the
difference between the price it pays to us for the offered certificates and
the amount it receives from the sale of the offered certificates to the
public. The underwriter currently intends to sell the offered certificates
at varying prices to be determined at the time of sale. See "Method of
Distribution" in this prospectus supplement.
LEHMAN BROTHERS
The date of this prospectus supplement is _________________.
<PAGE>
---------------------
IMPORTANT NOTICE ABOUT THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT,
THE ACCOMPANYING PROSPECTUS AND THE RELATED REGISTRATION STATEMENT
Information about the offered certificates is contained in two separate
documents:
- this prospectus supplement, which describes the specific terms
of the offered certificates; and
- the accompanying prospectus, which provides general information,
some of which may not apply to the offered certificates.
You should read both this prospectus supplement and the accompanying
prospectus in full to obtain material information concerning the offered
certificates.
In addition, we have filed with the Securities and Exchange Commission
a registration statement under the Securities Act of 1933, as amended, with
respect to the offered certificates. This prospectus
S-3
<PAGE>
supplement and the accompanying prospectus form a part of that registration
statement. However, this prospectus supplement and the accompanying prospectus
do not contain all of the information contained in our registration statement.
For further information regarding the documents referred to in this prospectus
supplement and the accompanying prospectus, you should refer to our registration
statement and the exhibits to it. Our registration statement and the exhibits to
it can be inspected and copied at prescribed rates at the public reference
facilities maintained by the SEC at its public reference section, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its regional offices located at:
Chicago regional office, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661; and New York regional office, Seven World Trade Center, New
York, New York 10048. Copies of these materials can also be obtained
electronically through the SEC's internet web site (http:\\www.sec.gov).
You should only rely on the information contained in this prospectus
supplement, the accompanying prospectus and our registration statement. We have
not authorized any person to give any other information or to make any
representation that is different from the information contained in this
prospectus supplement, the accompanying prospectus or our registration
statement.
S-4
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
PROSPECTUS SUPPLEMENT
<S> <C>
Important Notice About the Information Contained in this Prospectus Supplement, the Accompanying Prospectus and the Related
Registration Statement.........................................................................................................S-3
Summary of Prospectus Supplement...............................................................................................S-7
Risk Factors..................................................................................................................S-37
Capitalized Terms Used in this Prospectus Supplement..........................................................................S-51
Forward-Looking Statements....................................................................................................S-51
Description of the Mortgage Pool..............................................................................................S-51
Servicing of the Underlying Mortgage Loans....................................................................................S-75
Description of the Offered Certificates......................................................................................S-111
Yield and Maturity Considerations............................................................................................S-140
Use of Proceeds..............................................................................................................S-149
Federal Income Tax Consequences..............................................................................................S-150
ERISA Considerations.........................................................................................................S-154
Legal Investment.............................................................................................................S-160
Method of Distribution.......................................................................................................S-161
Legal Matters................................................................................................................S-162
Ratings......................................................................................................................S-162
Glossary.....................................................................................................................S-164
ANNEX A-1--Certain Characteristics of the Underlying Mortgage Loans...........................................................A-1-1
ANNEX A-2--Certain Monetary Terms of the Underlying Mortgage Loans............................................................A-2-1
ANNEX B--Term Sheet.............................................................................................................B-1
ANNEX C-1--Price/Yield Tables.................................................................................................C-1-1
ANNEX C-2--Decrement Tables...................................................................................................C-2-1
ANNEX D--Form of Delinquent Loan Status Report..................................................................................D-1
ANNEX E--Form of Historical Loan Modification Report............................................................................E-1
ANNEX F--Form of Historical Liquidation Report..................................................................................F-1
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
ANNEX G--Form of REO Status Report..............................................................................................G-1
ANNEX H--Form of Servicer Watch List Report.....................................................................................H-1
ANNEX I--Form of Operating Statement Analysis Report............................................................................I-1
ANNEX J--Form of NOI Adjustment Worksheet.......................................................................................J-1
ANNEX K--Form of Comparative Financial Status Report............................................................................K-1
PROSPECTUS
Important Notice About the Information Presented in this Prospectus..............................................................3
Available Information; Incorporation by Reference................................................................................3
Summary of Prospectus............................................................................................................4
Risk Factors....................................................................................................................13
Description of the Trust Assets.................................................................................................33
Yield and Maturity Considerations...............................................................................................56
Structured Asset Securities Corporation.........................................................................................62
Description of the Certificates.................................................................................................63
Description of the Governing Documents..........................................................................................73
Description of Credit Support...................................................................................................82
Legal Aspects of Mortgage Loans.................................................................................................85
Federal Income Tax Consequences.................................................................................................99
State and Other Tax Consequences...............................................................................................141
ERISA Considerations...........................................................................................................141
Legal Investment...............................................................................................................146
Use of Proceeds................................................................................................................148
Method of Distribution.........................................................................................................148
Legal Matters..................................................................................................................150
Financial Information..........................................................................................................150
Rating.........................................................................................................................150
</TABLE>
S-6
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
This summary contains selected information regarding the offering being
made by this prospectus supplement. It does not contain all of the information
you need to consider in making your investment decision. TO UNDERSTAND ALL OF
THE TERMS OF THE OFFERING OF THE OFFERED CERTIFICATES, YOU SHOULD READ CAREFULLY
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN FULL.
INTRODUCTION TO THE TRANSACTION
The offered certificates will be part of a series of commercial
mortgage pass-through certificates designated as the Series _____ Commercial
Mortgage Pass-Through Certificates and consisting of multiple classes. The table
below identifies the respective classes of that series, specifies various
characteristics of each of those classes and indicates which of those classes
are offered by this prospectus supplement and which are not.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
SERIES _____ COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES
----------------------------------------------------------------------------------------------------------------------------
APPROX. % APPROX.
OF TOTAL
APPROX. TOTAL INITIAL CREDIT WEIGHTED
PRINCIPAL MORTGAGE SUPPORT AT PASS-THROUGH INITIAL AVERAGE
BALANCE AT POOL INITIAL RATE PASS-THROUGH LIFE PRINCIPAL ____/____
CLASS INITIAL ISSUANCE BALANCE ISSUANCE DESCRIPTION RATE (YEARS) WINDOW RATINGS
----------------------------------------------------------------------------------------------------------------------------
Offered Certificates
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------------
A-1 $ % % %
----------------------------------------------------------------------------------------------------------------------------
A-2 $ % % %
----------------------------------------------------------------------------------------------------------------------------
B $ % % %
----------------------------------------------------------------------------------------------------------------------------
C $ % % %
----------------------------------------------------------------------------------------------------------------------------
D $ % % %
----------------------------------------------------------------------------------------------------------------------------
E $ % % %
----------------------------------------------------------------------------------------------------------------------------
F $ % % %
----------------------------------------------------------------------------------------------------------------------------
X N/A N/A N/A %
----------------------------------------------------------------------------------------------------------------------------
Non-Offered Certificates
----------------------------------------------------------------------------------------------------------------------------
G $ % N/A % N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
H $ % N/A % N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
J $ % N/A % N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
K $ % N/A % N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
L $ % N/A % N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
M $ % N/A % N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
N $ % N/A % N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
R-I N/A N/A N/A N/A N/A N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
R-II N/A N/A N/A N/A N/A N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
R-III N/A N/A N/A N/A N/A N/A N/A N/A
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The offered certificates will evidence beneficial ownership interests
in a common law trust designated as the LB Commercial Mortgage Trust
___________. We will form the trust at or prior to the time of initial issuance
of the offered certificates. The assets of the trust will include a pool of
multifamily and commercial mortgage loans having the characteristics described
in this prospectus supplement.
The governing document for purposes of issuing the offered certificates
and forming the trust will be a pooling and servicing agreement to be dated as
of ______________. The pooling and servicing agreement will also govern the
servicing and administration of the mortgage loans and the other assets that
back the offered certificates. The parties to the pooling and servicing
agreement will include us, a trustee, a master servicer and a special servicer.
A copy of the pooling and servicing agreement will be filed with the SEC as an
exhibit to a current report on Form 8-K, within 15 days after the initial
issuance of the offered certificates. The SEC will make that current report on
Form 8-K and its exhibits available to the public for inspection.
----------------------
KEY CERTIFICATE FEATURES SHOWN IN THE TABLE ABOVE
A. TOTAL PRINCIPAL BALANCE
S-8
<PAGE>
OR NOTIONAL AMOUNT AT
INITIAL ISSUANCE..................... The table above identifies for
each class of the series _____
certificates the approximate
total principal balance, if
any, of that class at initial
issuance. The actual total
principal balance of any class
of series _____ certificates
at initial issuance may be
larger or smaller than the
amount shown above, depending
on the actual size of the
initial mortgage pool balance.
The actual size of the initial
mortgage pool balance may be
as much as 5% larger or
smaller than the amount
presented in this prospectus
supplement.
As shown in the table above, the
class A-1, A-2, B, C, D, E, F, G,
H, J, K, L, M and N certificates
are the only series _____
certificates with principal
balances. The principal balance
of any of those certificates at
any time represents the maximum
amount that the holder may
receive as principal out of
cashflow received on or with
respect to the underlying
mortgage loans.
The class X certificates do not
have principal balances. They are
interest-only certificates. For
purposes of calculating the
amount of accrued interest with
respect to the class X
certificates, however, they will
have a total notional amount
equal to the total principal
balance of the class A-1, A-2, B,
C, D, E, F, G, H, J, K, L, M and
N certificates outstanding from
time to time. The total initial
notional amount of the class X
certificates will be
approximately $________________,
although it may be as much as 5%
larger or smaller.
The class R-I, R-II and R-III
certificates do not have
principal balances or notional
amounts. They are residual
interest certificates. The
holders of the class R-I, R-II
and R-III certificates are not
expected to receive any material
payments.
B. TOTAL CREDIT SUPPORT AT
INITIAL ISSUANCE.................... The respective classes of the
series _____ certificates
entitle their holders to
varying degrees of seniority
for purposes of--
- receiving payments of
interest and, if and when
applicable, payments of
principal, and
S-9
<PAGE>
- bearing the effects of
losses on the underlying
mortgage loans, as well
as default-related and
other unanticipated
expenses of the trust.
The class A-1, A-2 and X
certificates are the most senior.
The class R-I, R-II and R-III
certificates are the most
subordinate, but they do not
provide any credit support to the
other series _____ certificates.
The remaining classes of series
_____ certificates are listed
from top to bottom in descending
order of seniority.
The table above shows the
approximate total credit support
provided to each class of the
offered certificates, other than
the class X certificates, through
the subordination of other
classes of the series _____
certificates. In the case of each
of those classes of offered
certificates, the credit support
shown in the table above
represents the total initial
principal balance, expressed as a
percentage of the initial
mortgage pool balance, of all
classes of the series _____
certificates that are subordinate
to the indicated class.
C. PASS-THROUGH RATE....................... Each class of the series _____
certificates, other than the
class R-I, R-II and R-III
certificates, will bear interest.
The table above provides the
indicated information regarding
the pass-through rate at which
each of those classes of the
series _____ certificates will
accrue interest. [ADD SUMMARY
DESCRIPTIONS OF THE PASS-THROUGH
RATES FOR THE VARIOUS
INTEREST-BEARING CLASSES OF THE
SERIES _____ CERTIFICATES.]
S-10
<PAGE>
D. WEIGHTED AVERAGE LIFE
AND PRINCIPAL WINDOW................. The weighted average life of
any class of offered
certificates, other than the
class X certificates, refers to
the average amount of time that
will elapse from the date of
their issuance until each
dollar to be applied in
reduction of the total
principal balance of those
certificates is paid to the
investor. The principal window
for any class of offered
certificates, other than the
class X certificates, is the
period during which the holders
of that class of offered
certificates will receive
payments of principal. The
weighted average life and
principal window shown in the
table above for each class of
offered certificates, other
than the class X certificates,
were calculated based on the
following assumptions with
respect to each underlying
mortgage loan--
- the related borrower
timely makes all
payments on the
mortgage loan,
- if the mortgage loan
has an anticipated
repayment date, as
described under "--The
Underlying Mortgage
Loans and the
Mortgaged Real
Properties" below, the
mortgage loan will be
paid in full on that
date, and
- that mortgage loan
will not otherwise be
prepaid prior to
stated maturity.
The weighted average life and
principal window shown in the
table above for each class of
offered certificates, other than
the class X certificates, were
further calculated based on the
other maturity assumptions
described under "Yield and
Maturity Considerations" in this
prospectus supplement.
E. RATINGS The ratings shown in the table
above for the offered
certificates are those of
______________ and
_____________, respectively. It
is a condition to their
issuance that the respective
classes of the offered
certificates receive credit
ratings no lower than those
shown in the table above.
S-11
<PAGE>
The ratings of the offered
certificates address the timely
payment of interest and, except
in the case of the class X
certificates, the ultimate
payment of principal on or before
______________, which is the
rated final payment date. A
security rating is not a
recommendation to buy, sell or
hold securities and the assigning
rating agency may revise or
withdraw its rating at any time.
For a description of the
limitations of the ratings of
the offered certificates, see
"Ratings" in this prospectus
supplement.
S-12
<PAGE>
RELEVANT PARTIES
"WE" AND "US"............................... Our name is Structured Asset
Securities Corporation. We are
a special purpose Delaware
corporation. Our address is 200
Vesey Street, New York, New
York 10285 and our telephone
number is (212) 526-7000. See
"Structured Asset Securities
Corporation" in the
accompanying prospectus.
INITIAL TRUSTEE.............................. ________________________, will
act as the initial trustee on
behalf of all the series _____
certificateholders. See
"Description of the Offered
Certificates--The Trustee" in
this prospectus supplement. The
trustee will also have, or be
responsible for appointing an
agent to perform, additional
duties with respect to tax
administration.
INITIAL MASTER SERVICER..................... ________________________, a
________ corporation, will act
as the initial master servicer
with respect to the pooled
mortgage loans. See "Servicing
of the Underlying Mortgage
Loans--The Initial Master
Servicer and the Initial
Special Servicer" in this
prospectus supplement.
S-13
<PAGE>
INITIAL SPECIAL SERVICER.................... ________________________, a
__________ corporation, will
act as the initial special
servicer with respect to the
pooled mortgage loans. See
"Servicing of the Underlying
Mortgage Loans--The Initial
Master Servicer and the Initial
Special Servicer" in this
prospectus supplement.
CONTROLLING CLASS
OF CERTIFICATEHOLDERS.................... The holders of certificates
representing a majority
interest in a designated
controlling class of the series
_____ certificates will have
the right, subject to the
conditions described under
"Servicing of the Underlying
Mortgage Loans--The Controlling
Class Representative" and
"--Replacement of the Special
Servicer" in this prospectus
supplement, to--
- replace the special
servicer, and
- select a
representative that
may direct and advise
the special servicer
on various servicing
matters.
Unless there are significant
losses on the underlying mortgage
loans, the controlling class of
series _____ certificateholders
will be the holders of a
non-offered class of series _____
certificates.
MORTGAGE LOAN SELLERS....................... We will acquire the mortgage
loans that are to back the
offered certificates, from--
- ________________________,
a _________________,
and
- ________________________,
a ___________________.
See "Description of the
Mortgage Pool--The Mortgage
Loan Sellers" in this
prospectus supplement.
UNDERWRITER................................. Lehman Brothers Inc., a
Delaware corporation, is the
underwriter of this offering.
See "Method of Distribution" in
this prospectus supplement.
S-14
<PAGE>
RELEVANT DATES AND PERIODS
CUT-OFF DATE................................ The pooled mortgage loans will
be considered part of the trust
as of a cut-off date of
___________. All payments and
collections received on the
underlying mortgage loans after
that date, excluding any
payments or collections that
represent amounts due on or
before that date, will belong
to the trust. Accordingly,
__________ is the date as of
which we present much of the
information relating to the
underlying mortgage loans and
the mortgaged real properties
for those loans in this
prospectus supplement.
ISSUE DATE.................................. The date of initial issuance
for the offered certificates
will be on or about
____________.
PAYMENT DATE................................ Payments on the offered
certificates are scheduled to
occur monthly, commencing in
____________. During any given
month, the payment date will be
the _____ calendar day of that
month, or, if the _____
calendar day of that month is
not a business day, then the
next succeeding business day.
RECORD DATE................................. The record date for each
monthly payment on an offered
certificate will be the last
business day of the prior
calendar month. The registered
holders of the offered
certificates at the close of
business on each record date,
will be entitled to receive any
payments on those certificates
on the following payment date.
COLLECTION PERIOD........................... Amounts available for payment
on the offered certificates on
any payment date will depend on
the payments and other
collections received, and any
advances of payments due, on
the underlying mortgage loans
during the related collection
period. Each collection
period--
- will relate to a
particular payment
date,
- will be approximately
one month long,
- will begin when the
prior collection
period ends or, in the
case of the first
collection period,
will begin on
______________, and
- will end during the
month of, but prior
to, the related
payment date.
S-15
<PAGE>
INTEREST ACCRUAL PERIOD..................... The amount of interest payable
with respect to the offered
certificates on any payment
date will be a function of the
interest accrued during the
related interest accrual
period. The interest accrual
period for any payment date
will be [the calendar month
immediately preceding the month
in which that payment date
occurs].
DESCRIPTION OF THE OFFERED CERTIFICATES
REGISTRATION AND
DENOMINATIONS.......................... We intend to deliver the
offered certificates in
book-entry form in original
denominations of:
S-16
<PAGE>
- in the case of the
class X certificates,
$_______ initial
notional amount and in
any whole dollar
denomination in excess
of $_______; and
- in the case of the
other offered
certificates, $_______
initial principal
balance and in any
whole dollar
denomination in excess
of $_______.
You will initially hold your
offered certificates through The
Depository Trust Company. As a
result, you will not receive a
fully registered physical
certificate representing your
interest in any offered
certificate, except under the
limited circumstances described
under "Description of the Offered
Certificates--Registration and
Denominations" in this prospectus
supplement and under "Description
of the Certificates--Book-Entry
Registration" in the accompanying
prospectus. We may elect to
terminate the book-entry system
through DTC with respect to all
or any portion of any class of
offered certificates.
S-17
<PAGE>
PAYMENTS
A. GENERAL................................. The trustee will make payments
of interest and principal to
the respective classes of
series _____ certificateholders
entitled to those payments,
sequentially as follows:
<TABLE>
<CAPTION>
PAYMENT ORDER CLASS
<S> <C>
1 A-1, A-2 and X
2 B
3 C
4 D
5 E
6 F
7 G
8 H
9 J
10 K
11 L
12 M
13 N
</TABLE>
Allocation of interest payments
among the class A-1, A-2 and X
certificates is PRO RATA based on
entitlement. Allocation of
principal payments between the
class A-1 and A-2 certificates is
described under
"--Payments--Payments of
Principal" below. The class X
certificates do not have
principal balances and do not
entitle their holders to payments
of principal.
See "Description of the Offered
Certificates--Payments--Priority
of Payments" in this prospectus
supplement.
B. PAYMENTS OF INTEREST.................... Each class of offered
certificates will bear
interest. In each case, that
interest will accrue during
each interest accrual period
based upon--
- the pass-through rate
applicable for the
particular class for
that interest accrual
period,
- the total principal
balance or notional
amount, as the case
S-18
<PAGE>
may be, of the
particular class
outstanding
immediately prior to
the related payment
date, and
- the assumption that
each year consists of
12 30-day months.
A whole or partial prepayment on
an underlying mortgage loan may
not be accompanied by the amount
of one full month's interest on
the prepayment. As and to the
extent described under
"Description of the Offered
Certificates--Payments--Payments
of Interest" in this prospectus
supplement, these shortfalls may
be allocated to reduce the amount
of accrued interest otherwise
payable to the holders of all of
the interest-bearing classes of
the series _____ certificates,
including the offered
certificates, on a PRO RATA basis
in accordance with the respective
amounts of interest otherwise
payable on those classes for the
corresponding interest accrual
period.
On each payment date, subject to
available funds and the payment
priorities described under
"--Payments--General" above, you
will be entitled to receive your
proportionate share of all unpaid
distributable interest accrued
with respect to your class of
offered certificates through the
end of the related interest
accrual period.
See "Description of the Offered
Certificates--Payments--Payments
of Interest" and
"--Payments--Priority of
Payments" in this prospectus
supplement.
C. PAYMENTS OF PRINCIPAL................... The class X certificates do not
have principal balances and do
not entitle their holders to
payments of principal. Subject
to available funds and the
payment priorities described
under "--Payments--General"
above, however, the holders of
each other class of offered
certificates will be entitled to
receive a total amount of
principal over time equal to the
total principal balance of their
particular class. The trustee
must make payments of principal
in a specified sequential order
to ensure that--
- no payments of
principal will be made
to the holders of any
non-offered class of
series _____
certificates until the
total principal
balance of the offered
certificates is
reduced to zero,
S-19
<PAGE>
- no payments of
principal will be made
to the holders of the
class B, C, D, E or F
certificates until, in
the case of each of
those classes, the
total principal
balance of all more
senior classes of
offered certificates
is reduced to zero,
and
- except as described in
the following
paragraph, no payments
of principal will be
made to the holders of
the class A-2
certificates until the
total principal
balance of the class
A-1 certificates is
reduced to zero.
Because of losses on the
underlying mortgage loans and/or
default-related or other
unanticipated expenses of the
trust, the total principal
balance of the class B, C, D, E,
F, G, H, J, K, L, M and N
certificates could be reduced to
zero at a time when the class A-1
and A-2 certificates remain
outstanding. Under those
circumstances, any payments of
principal on the class A-1 and
A-2 certificates will be made on
a PRO RATA basis in accordance
with their respective principal
balances.
The total payments of principal
to be made on the series _____
certificates on any payment
date will be a function of--
- the amount of
scheduled payments of
principal due or, in
some cases, deemed due
on the underlying
mortgage loans during
the related collection
period, which payments
are either received as
of the end of that
collection period or
advanced by the master
servicer, and
- the amount of any
prepayments and other
unscheduled
collections of
previously unadvanced
principal with respect
to the underlying
mortgage loans that
are received during
the related collection
period.
See "Description of the Offered
Certificates--Payments--Payments
of Principal" and
"--Payments--Priority of
Payments" in this prospectus
supplement.
S-20
<PAGE>
D. PAYMENTS OF PREPAYMENT
PREMIUMS AND YIELD
MAINTENANCE CHARGES.................. If any prepayment premium or
yield maintenance charge is
collected on any of the pooled
mortgage loans, then the
trustee will pay that amount in
the proportions described under
"Description of the Offered
Certificates--Payments
"Payments of Prepayment
Premiums and Yield Maintenance
Charges" in this prospectus
supplement, to--
- the holders of the
class X certificates,
and/or
- the holders of any
other class or classes
of certificates senior
to the class
_____certificates,
that are then entitled
to receive payments of
principal.
S-21
<PAGE>
REDUCTIONS OF CERTIFICATE PRINCIPAL
BALANCES IN CONNECTION WITH LOSSES
ON THE UNDERLYING MORTGAGE LOANS
AND DEFAULT-RELATED AND OTHER
UNANTICIPATED EXPENSES................... Because of losses on the
underlying mortgage loans
and/or default-related and
other unanticipated expenses of
the trust, the total principal
balance of the mortgage pool,
net of advances of principal,
may fall below the total
principal balance of the series
_____ certificates. If and to
the extent that those losses
and expenses cause a deficit to
exist following the payments
made on the series _____
certificates on any payment
date, the total principal
balances of the following
classes of series _____
certificates will be
successively reduced in the
following order, until that
deficit is eliminated:
<TABLE>
<CAPTION>
REDUCTION ORDER CLASS
<S> <C>
1 N
2 M
3 L
4 K
5 J
6 H
7 G
8 F
9 E
10 D
11 C
12 B
13 A-1 and A-2
</TABLE>
Any reduction to the total
principal balances of the class
A-1 and class A-2 certificates
will be made on a PRO RATA basis
in accordance with the relative
sizes of those principal
balances.
See "Description of the Offered
Certificates--Reductions of
Certificate Principal Balances in
Connection With Realized
S-22
<PAGE>
Losses and Additional Trust
Fund Expenses" in this
prospectus supplement.
ADVANCES OF DELINQUENT MONTHLY
DEBT SERVICE PAYMENTS................... Except as described in the next
two paragraphs, the master
servicer will be required to
make advances with respect to
any delinquent monthly
payments, other than balloon
payments, of principal and/or
interest due on the pooled
mortgage loans. In addition,
the trustee must make any of
those advances that the master
servicer fails to make. As
described under "Description of
the Offered
Certificates--Advances of
Delinquent Monthly Debt Service
Payments" in this prospectus
supplement, any party that
makes an advance will be
entitled to be reimbursed for
the advance, together with
interest at the prime rate
described in that section of
this prospectus supplement.
Notwithstanding the foregoing,
neither of the master servicer
nor the trustee will be required
to make any advance that it
determines, in its good faith and
reasonable judgment, will not be
recoverable from proceeds of the
related mortgage loan.
In addition, if any of the
adverse events or circumstances
that we describe under "Servicing
of the Underlying Mortgage
Loans--Required Appraisals" in
this prospectus supplement, occur
or exist with respect to any
pooled mortgage loan or the
mortgaged real property for that
loan, the special servicer will
be obligated to obtain a new
appraisal or, in cases involving
relatively small principal
balances, conduct a valuation of
that property. If, based on that
appraisal or other valuation, it
is determined that--
- the principal balance
of, and other
delinquent amounts due
under, the mortgage
loan, exceed
- 90% of the new
estimated value of
that real property,
S-23
<PAGE>
then the amount otherwise
required to be advanced with
respect to interest on that
mortgage loan will be reduced.
The reduction will be in the same
proportion that the excess bears
to the principal balance of the
mortgage loan, net of related
advances of principal. Due to the
payment priorities, any reduction
in advances will reduce the funds
available to pay interest on the
most subordinate interest-bearing
class of series _____
certificates then outstanding.
See "Description of the Offered
Certificates--Advances of
Delinquent Monthly Debt Service
Payments" and "Servicing of the
Underlying Mortgage
Loans--Required Appraisals" in
this prospectus supplement. See
also "Description of the
Certificates--Advances" in the
accompanying prospectus.
REPORTS TO CERTIFICATEHOLDERS............... On each payment date, the
following reports will be
available to you and will
contain the information
described under "Description of
the Offered
Certificates--Reports to
Certificateholders; Available
Information" in this prospectus
supplement:
- Delinquent Loan Status
Report
- Historical Liquidation
Report
- Historical Loss
Estimate Report
- REO Status Report
- Servicer Watch List
Report
- Loan Payoff
Notification Report
- Comparative Financial
Status Report
- Operating Statement
Analysis Report
S-24
<PAGE>
Upon reasonable prior notice, you
may also review at the trustee's
offices during normal business
hours a variety of information
and documents that pertain to the
pooled mortgage loans and the
mortgaged real properties for
those loans. We expect that the
available information and
documents will include loan
documents, borrower operating
statements, rent rolls and
property inspection reports, to
the extent received by the
trustee.
See "Description of the Offered
Certificates--Reports to
Certificateholders; Available
Information" in this prospectus
supplement.
OPTIONAL AND OTHER TERMINATION.............. Specified parties to the
transaction may terminate the
trust when the total principal
balance of the related mortgage
pool, net of advances of
principal, is less than
approximately ____% of the
initial mortgage pool balance.
See "Description of the Offered
Certificates--Termination" in
this prospectus supplement.
THE UNDERLYING MORTGAGE LOANS AND THE MORTGAGED REAL PROPERTIES
GENERAL..................................... In this section, "--The
Underlying Mortgage Loans and
the Mortgaged Real Properties",
we provide summary information
with respect to the mortgage
loans that we intend to include
in the trust. For more detailed
information regarding those
mortgage loans, you should
review the following sections
in this prospectus supplement:
- "Description of the
Mortgage Pool"
- "Risk Factors--Risks
Related to the
Underlying Mortgage
Loans"
S-25
<PAGE>
- Annex A-1-Certain
Characteristics of the
Underlying Mortgage
Loans
- Annex A-2-Certain
Monetary Terms of the
Underlying Mortgage
Loans
When reviewing the information
that we have included in this
prospectus supplement with
respect to the mortgage loans
that are to back the offered
certificates, please note that--
- All numerical
information provided
with respect to the
mortgage loans is
provided on an
approximate basis.
- All weighted average
information provided
with respect to the
mortgage loans
reflects a weighting
based on their
respective cut-off
date principal
balances. We will
transfer the cut-off
date principal balance
for each of the
mortgage loans to the
trust. We show the
cut-off date principal
balance for each of
the mortgage loans on
Annex A-1 to this
prospectus supplement.
- When information with
respect to mortgaged
real properties is
expressed as a
percentage of the
initial mortgage pool
balance, the
percentages are based
upon the cut-off date
principal balances of
the related mortgage
loans.
- If any of the mortgage
loans is secured by
multiple real
properties located in
more than one state, a
portion of that
mortgage loan has been
allocated to each of
those properties.
S-26
<PAGE>
- Statistical
information regarding
the mortgage loans may
change prior to the
date of initial
issuance of the
offered certificates
due to changes in the
composition of the
mortgage pool prior to
that date.
SOURCE OF THE
UNDERLYING MORTGAGE LOANS................ We are not the originator of
the mortgage loans that we
intend to include in the trust.
We will acquire those mortgage
loans from _____ separate
parties. Each of those mortgage
loans was originated by--
- the related mortgage
loan seller from whom
we acquired the
mortgage loan,
- an affiliate of the
related mortgage loan
seller, or
- a correspondent in the
related mortgage loan
seller's conduit
lending program.
PAYMENT AND OTHER TERMS..................... Each of the mortgage loans that
we intend to include in the
trust is the obligation of a
borrower to repay a specified
sum with interest.
Repayment of each of the mortgage
loans is secured by a mortgage
lien on the ownership and/or
leasehold interest of the related
borrower or another party in one
or more commercial or multifamily
real properties. Except for
limited permitted encumbrances,
which we describe in the
"Glossary" to this prospectus
supplement, that mortgage lien
will be a first priority lien.
All of the mortgage loans are or
should be considered nonrecourse.
None of the mortgage loans are
insured or guaranteed by any
governmental agency or
instrumentality or by any private
mortgage insurer.
S-27
<PAGE>
Each of the mortgage loans
currently accrues interest at the
annual rate specified with
respect to that loan on Annex A-1
to this prospectus supplement.
Except as otherwise described
below with respect to mortgage
loans that have anticipated
repayment dates, the mortgage
interest rate for each mortgage
loan is, in the absence of
default, fixed for the entire
term of the loan. [IF ANY OF THE
MORTGAGE LOANS HAVE FLOATING OR
ADJUSTABLE MORTGAGE INTEREST
RATES, PROVIDE SUMMARY
DESCRIPTION OF HOW TO CALCULATE
THOSE RATES.]
Each of the mortgage loans
provides for scheduled payments
of principal and/or interest to
be due on the ________ day of
each month. [PROVIDE SUMMARY
DESCRIPTION REGARDING ANY
ADJUSTMENTS TO THE MONTHLY DEBT
SERVICE PAYMENTS AND ANY
POTENTIAL NEGATIVE AMORTIZATION
OF INTEREST.]
________ of the mortgage loans,
representing ____% of the
initial mortgage pool balance,
provide for:
- an amortization
schedule that is
significantly longer
than its remaining
term to stated
maturity; and
- a substantial payment
of principal on its
maturity date.
________ of the mortgage loans,
representing ____% of the initial
mortgage pool balance, provide
material incentives to the
related borrower to pay the
mortgage loan in full by a
specified date. We consider that
date to be the anticipated
repayment date for the mortgage
loan. There can be no assurance,
however, that these incentives
will result in any of these
mortgage loans being paid in full
on or before its anticipated
repayment date. The incentives,
which in each case will become
effective as of the related
anticipated repayment date,
include:
- The calculation of
interest in excess of
the initial mortgage
interest rate. The
additional interest
will be deferred and
will be
S-28
<PAGE>
payable only after the
outstanding principal
balance of the mortgage
loan is paid in full.
- The application of
excess cash flow from
the mortgaged real
property to pay the
principal amount of
the mortgage loan. The
payment of principal
will be in addition to
the principal portion
of the normal monthly
debt service payment.
The remaining _______ mortgage
loans, representing ____% of the
initial mortgage pool balance,
have payment schedules that
provide for the payment of these
mortgage loans in full or
substantially in full by their
respective maturity dates.
DELINQUENCY STATUS.......................... None of the mortgage loans that
we intend to include in the
trust was _____ days or more
delinquent with respect to any
monthly debt service payment as
of the cut-off date or at any
time during the _____-month
period preceding that date.
PREPAYMENT LOCK-OUT PERIODS................. A prepayment lock-out period is
currently in effect for
________ of the mortgage loans
to be included in the trust.
Set forth below is information
regarding the remaining terms
of those lock-out periods:
Maximum remaining lock-out period: _____ months
Minimum remaining lock-out period: _____ months
Weighted average remaining lock-out period: _____ months
DEFEASANCE.................................. ________ of the mortgage loans
to be included in the trust,
representing ____% of the
initial mortgage pool balance,
permit the related borrower to
obtain a full or partial
release of the mortgaged real
property from the related
mortgage lien by delivering
U.S. Treasury obligations as
substitute collateral. None of
these mortgage loans permits
defeasance prior to the
________ anniversary of the
date of initial issuance of the
certificates.
S-29
<PAGE>
ADDITIONAL STATISTICAL INFORMATION
A. GENERAL CHARACTERISTICS................. The mortgage pool will have the
following general
characteristics as of the
cut-off date:
<TABLE>
<CAPTION>
<S> <C>
Initial mortgage pool balance............................. $
Number of mortgage loans..................................
Number of mortgaged real properties.......................
Maximum cut-off date principal balance.................... $
Minimum cut-off date principal balance.................... $
Average cut-off date principal balance.................... $
Maximum mortgage interest rate............................ %
Minimum mortgage interest rate............................ %
Weighted average mortgage interest rate................... %
Maximum original term to maturity
or anticipated repayment date......................... months
Minimum original term to maturity
or anticipated repayment date......................... months
Weighted average original term to maturity
or anticipated repayment date......................... months
Maximum remaining term to maturity
or anticipated repayment date......................... months
Minimum remaining term to maturity
or anticipated repayment date......................... months
Weighted average remaining term to
maturity or anticipated repayment date................ months
</TABLE>
S-30
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Maximum underwritten debt
service coverage ratio................................ x
Minimum underwritten debt
service coverage ratio................................ x
Weighted average underwritten debt
service coverage ratio................................ x
Maximum cut-off date loan-to-appraised
value ratio.......................................... %
Minimum cut-off date loan-to-appraised
value ratio.......................................... %
Weighted average cut-off date loan-to-
appraised value ratio................................. %
</TABLE>
B. STATE CONCENTRATION..................... The table below shows the
number of, and percentage of
the initial mortgage pool
balance secured by, mortgaged
real properties located in the
indicated states:
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL MORTGAGE
STATE PROPERTIES POOL BALANCE
<S> <C> <C>
%
%
%
</TABLE>
S-31
<PAGE>
The remaining mortgaged real
properties with respect to the
mortgage pool, are located
throughout ________ other states
and ________________. No more
than ____% of the initial
mortgage pool balance is secured
by mortgaged real properties
located in any of these other
jurisdictions.
C. PROPERTY TYPES.......................... The table below shows the
number of, and percentage of
the initial mortgage pool
balance secured by, mortgaged
real properties operated for
each indicated purpose:
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL MORTGAGE
PROPERTY TYPE PROPERTIES POOL BALANCE
<S> <C> <C>
%
%
%
%
%
%
%
%
</TABLE>
D. ENCUMBERED INTERESTS.................... The table below shows the
number of, and percentage of
the initial mortgage pool
balance secured by, mortgaged
real properties for which the
encumbered interest is as
indicated:
<TABLE>
<CAPTION>
% OF
ENCUMBERED INTEREST IN THE NUMBER OF INITIAL MORTGAGE
MORTGAGED REAL PROPERTY PROPERTIES POOL BALANCE
<S> <C> <C>
Ownership %
Ownership in part, %
Leasehold in part
Leasehold %
Other %
</TABLE>
S-32
<PAGE>
LEGAL AND INVESTMENT CONSIDERATIONS
FEDERAL INCOME
TAX CONSEQUENCES......................... The trustee or its agent will
make elections to treat
designated portions of the
assets of the trust as three
separate real estate mortgage
investment conduits under
Sections 860A through 860G of
the Internal Revenue Code of
1986. The designations for each
of those three REMICs are as
follows:
- REMIC I, the lowest
tier REMIC, which will
consist of, among
other things--
1. the pooled
mortgage
loans, and
2. any mortgaged
real
properties
that may be
acquired by
the trust
following a
borrower
default,
but will exclude
collections of
additional interest
accrued and deferred as
to payment with respect
to each mortgage loan
with an anticipated
repayment date that
remains outstanding past
that date;
- REMIC II, which will
hold the regular
interests in REMIC I;
and
- REMIC III, which will
hold the regular
interests in REMIC II.
[Any assets not included in a
REMIC will constitute a grantor
trust for federal income tax
purposes.]
The offered certificates will be
treated as regular interests in
REMIC III. This means that they
will be treated as newly issued
debt instruments for federal
income tax
S-33
<PAGE>
purposes. You will have to
report income on your offered
certificates in accordance with
the accrual method of
accounting even if you are
otherwise a cash method
taxpayer. The offered
certificates will not represent
any interest in the grantor
trust referred to above.
The class _____ and _____
certificates will be issued with
more than a DE MINIMIS amount of
original issue discount. The
class _____ certificates will be
issued with a DE MINIMIS amount
of original issue discount. The
other offered certificates will
not be issued with any original
issue discount. If you own an
offered certificate issued with
original issue discount, you may
have to report original issue
discount income and be subject to
a tax on this income before you
receive a corresponding cash
payment.
For a more detailed discussion of
the federal income tax aspects of
investing in the offered
certificates, see "Federal Income
Tax Consequences" in this
prospectus supplement and
"Federal Income Tax Consequences"
in the accompanying prospectus.
ERISA....................................... We anticipate that, subject to
satisfaction of the conditions
referred to under "ERISA
Considerations" in this
prospectus supplement,
retirement plans and other
employee benefit plans and
arrangements subject to--
- Title I of the
Employee Retirement
Income Security Act of
1974, as amended, or
- Section 4975 of the
Internal Revenue Code
of 1986,
will be able to invest in the
class A-1, A-2 and X
certificates without giving
rise to a prohibited
transaction. This is based upon
an individual prohibited
transaction exemption granted
to the underwriter by the U.S.
Department of Labor. However,
investments in the other
offered certificates by, on
behalf of or with assets of
these entities, will be
restricted as described under
"ERISA Considerations" in this
prospectus supplement.
If you are a fiduciary of any
retirement plan or other employee
benefit plan or arrangement
subject to Title I of ERISA or
section 4975 of the Internal
Revenue Code of 1986, you should
review carefully with your legal
advisors whether the purchase or
S-34
<PAGE>
holding of the offered
certificates could give rise to a
transaction that is prohibited
under ERISA or Section 4975 of
the Internal Revenue Code of
1986. See "ERISA Considerations"
in this prospectus supplement and
in the accompanying prospectus.
LEGAL INVESTMENT............................ [Upon initial issuance, the
following classes of offered
certificates will constitute
mortgage related securities
for purposes of the Secondary
Mortgage Market Enhancement Act
of 1984:
- class A-1,
- class A-2,
- class B, and
- class X.
The other offered certificates
will NOT be "mortgage related
securities" within the meaning
of SMMEA.]
You should consult your own legal
advisors to determine whether and
to what extent the offered
certificates will be legal
investments for you. See "Legal
Investment" in this prospectus
supplement and in the
accompanying prospectus.
CERTAIN INVESTMENT
CONSIDERATIONS........................... The rate and timing of payments
and other collections of
principal on or with respect to
the underlying mortgage loans
will affect the yield to
maturity on each offered
certificate. In the case of
offered certificates purchased
at a discount, a slower than
anticipated rate of payments
and other collections of
principal on the underlying
mortgage loans could result in
a lower than anticipated yield.
In the case of class X
certificates or any other
offered certificates purchased
at a premium, a faster than
anticipated rate of payments
and other collections of
principal on the underlying
mortgage loans could result in
a lower than anticipated yield.
If you are contemplating the
purchase of class X
certificates, you should be
aware that-
- the yield to maturity
on those certificates
will be highly
sensitive to the rate
and timing of
principal prepayments
and other
S-35
<PAGE>
liquidations on or with
respect to the
underlying mortgage
loans, and
- that an extremely
rapid rate of
prepayments and/or
other liquidations on
or with respect to the
underlying mortgage
loans could result in
a substantial loss of
your initial
investment.
See "Yield and Maturity
Considerations" in this
prospectus supplement and in
the accompanying prospectus.
S-36
<PAGE>
RISK FACTORS
The offered certificates are not suitable investments for all
investors. In particular, you should not purchase any class of offered
certificates unless you understand and are able to bear the risks associated
with that class.
The offered certificates are complex securities and it is important
that you possess, either alone or together with an investment advisor, the
expertise necessary to evaluate the information contained in this prospectus
supplement and the accompanying prospectus in the context of your financial
situation.
You should consider the following factors, as well as those set forth
under "Risk Factors" in the accompanying prospectus, in deciding whether to
purchase any offered certificates. The "Risk Factors" section in the
accompanying prospectus includes a number of general risks associated with
making an investment in the offered certificates.
RISKS RELATED TO THE OFFERED CERTIFICATES
S-37
<PAGE>
THE CLASS B, C, D, E AND F CERTIFICATES ARE SUBORDINATE TO, AND ARE
THEREFORE RISKIER THAN, THE CLASS A-1, A-2 AND X CERTIFICATES. If you purchase
class B, C, D, E or F certificates, then your offered certificates will provide
credit support to other classes of offered certificates. As a result, you will
receive payments after, and must bear the effects of losses on the underlying
mortgage loans before, the holders of those other classes of offered
certificates.
When making an investment decision, you should consider, among other
things-
S-38
<PAGE>
- the payment priorities of the respective classes of the
certificates,
- the order in which the principal balances of the respective
classes of the certificates with balances will be reduced in
connection with losses and default-related shortfalls, and
- the characteristics and quality of the mortgage loans in the
trust.
See "Description of the Mortgage Pool" and "Description of the Offered
Certificates--Payments" and "--Reductions of Certificate Principal Balances in
Connection With Realized Losses and Additional Trust Fund Expenses" in this
prospectus supplement. See also "Risk Factors--The Investment Performance of
Your Offered Certificates Will Depend Upon Payments, Defaults and Losses on the
Underlying Mortgage Loans; and Those Payments, Defaults and Losses may be Highly
Unpredictable", "--Any Credit Support for Your Offered Certificates may be
Insufficient to Protect you Against all Potential Losses" and "--Payments on the
Offered Certificates Will be Made Solely from the Limited Assets of the Related
Trust, and Those Assets may be Insufficient to Make all Required Payments on
Those Certificates" in the accompanying prospectus.
THE OFFERED CERTIFICATES HAVE UNCERTAIN YIELDS TO MATURITY. The yield
on your offered certificates will depend on--
- the price you paid for your offered certificates, and
- the rate, timing and amount of payments on your offered
certificates.
The rate, timing and amount of payments on your offered certificates
will depend on:
- the pass-through rate for your offered certificates;
- the rate and timing of payments and other collections of
principal on the underlying mortgage loans;
- the rate and timing of defaults, and the severity of losses,
if any, on the underlying mortgage loans;
- the rate, timing, severity and allocation of other shortfalls
and expenses that reduce amounts available for payment on your
offered certificates;
- the collection and payment of prepayment premiums and yield
maintenance charges with respect to the underlying mortgage
loans; and
- servicing decisions with respect to the underlying mortgage
loans.
These factors cannot be predicted with any certainty. Accordingly, you
may find it difficult to analyze the effect that these factors might have on the
yield to maturity of your offered certificates.
S-39
<PAGE>
See "Description of the Mortgage Pool", "Servicing of the Underlying
Mortgage Loans", "Description of the Offered Certificates--Payments" and
"-Reductions of Certificate Principal Balances in Connection With Realized
Losses and Additional Trust Fund Expenses" and "Yield and Maturity
Considerations" in this prospectus supplement. See also "Risk Factors--The
Investment Performance of Your Offered Certificates Will Depend Upon Payments,
Defaults and Losses on the Underlying Mortgage Loans; and Those Payments,
Defaults and Losses may be Highly Unpredicatable" and "Yield and Maturity
Considerations" in the accompanying prospectus.
THE INVESTMENT PERFORMANCE OF YOUR OFFERED CERTIFICATES MAY VARY
MATERIALLY AND ADVERSELY FROM YOUR EXPECTATIONS BECAUSE THE RATE OF PREPAYMENTS
AND OTHER UNSCHEDULED COLLECTIONS OF PRINCIPAL ON THE UNDERLYING MORTGAGE LOANS
IS FASTER OR SLOWER THAN YOU ANTICIPATED.
If you purchase your offered certificates at a premium, and if payments
and other collections of principal on the mortgage loans in the trust occur at a
rate faster than you anticipated at the time of your purchase, then your actual
yield to maturity may be lower than you had assumed at the time of your
purchase. Conversely, if you purchase your offered certificates at a discount,
and if payments and other collections of principal on the mortgage loans in the
trust occur at a rate slower than you anticipated at the time of your purchase,
then your actual yield to maturity may be lower than you had assumed at the time
of your purchase. You should consider that prepayment premiums and yield
maintenance charges may not be collected in all circumstances. Furthermore, even
if a prepayment premium or yield maintenance charge is collected and payable on
your offered certificates, it may not be sufficient to offset fully any loss in
yield on your offered certificates.
If you purchase class X certificates, your yield to maturity will be
particularly sensitive to the rate and timing of principal payments and losses
on the mortgage loans. Prior to investing in those certificates, you should
fully consider the associated risks, including the risk that an extremely rapid
rate of amortization, prepayment or other liquidation of the mortgage loans
could result in your failure to recover fully your initial investment. The
ratings on the class X certificates do not address whether a purchaser of those
certificates would be able to recover its initial investment in them.
The yield on the offered certificates with variable pass-through rates
could also be adversely affected if the mortgage loans with higher mortgage
interest rates pay principal faster than the mortgage loans with lower mortgage
interest rates. This is because those classes bear interest at pass-through
rates equal to, based upon or limited by, as applicable, a weighted average of
net interest rates derived from the mortgage loans.
S-40
<PAGE>
ERISA CONSIDERATIONS. The regulations that govern pension and other
employee benefit plans subject to ERISA and plans and other retirement
arrangements subject to Section 4975(c) of the Internal Revenue Code of 1986 are
complex. Accordingly, if you are using the assets of a plan or arrangement to
acquire offered certificates, you are urged to consult legal counsel regarding
consequences under ERISA and the Internal Revenue Code of 1986 of the
acquisition, ownership and disposition of those certificates. In particular, the
purchase or holding of class B, C, D, E and F certificates by any plan or
arrangement may result in a prohibited transaction or the imposition of excise
taxes or civil penalties. As a result, these offered certificates should not be
acquired by, on behalf of, or with assets of any plan or arrangement, unless the
purchase and continued holding of the certificate or an interest in the
certificate is exempt from the prohibited transaction provisions of Section 406
of ERISA and Section 4975 of the Internal Revenue Code of 1986 under Sections I
and III of Prohibited
S-41
<PAGE>
Transaction Class Exemption 95-60. Sections I and III of
Prohibited Transaction Class Exemption 95-60 provide an exemption from the
prohibited transaction rules for some transactions involving an insurance
company general account.
See "ERISA Considerations" in this prospectus supplement and in the
accompanying prospectus.
RISKS RELATED TO THE UNDERLYING MORTGAGE LOANS
REPAYMENT OF THE UNDERLYING MORTGAGE LOANS DEPENDS ON THE OPERATION OF
THE MORTGAGED REAL PROPERTIES. The underlying mortgage loans are secured by
mortgage liens on ownership and/or leasehold interests in the following types of
real property:
[SPECIFY PROPERTY TYPES.]
The risks associated with lending on these types of real properties are
inherently different from those associated with lending on the security of
single-family residential properties. This is because, among other reasons,
repayment of each of the underlying mortgage loans is dependent on--
- the successful operation and value of the mortgaged real
property, and
- the related borrower's ability to sell or refinance the
mortgaged real property.
See "Risk Factors--Repayment of a Commercial or Multifamily Mortgage
Loan Depends Upon the Performance and Value of the Underlying Real Property,
Which may Decline Over Time, and the Related Borrower's Ability to Refinance the
Property, of Which There is no Assurance" and "Description of the Trust
Assets--Mortgage Loans--A Discussion of Various Types of Multifamily and
Commercial Properties That May Secure Mortgage Loans Underlying a Series of
Offered Certificates" in the accompanying prospectus.
THE UNDERLYING MORTGAGE LOANS HAVE A VARIETY OF CHARACTERISTICS WHICH
MAY EXPOSE INVESTORS TO GREATER RISK OF DEFAULT AND LOSS. When making an
investment decision, you should consider, among other things, the following
characteristics of the underlying mortgage loans and/or the mortgaged real
properties for those loans. Any or all of these characteristics can affect,
perhaps materially and adversely, the investment performance of your offered
certificates. Each of the respective items below includes a cross-reference to
where the associated risks are further discussed in this prospectus supplement
or in the accompanying prospectus. In addition, each of those items may include
a cross reference to where further information about the particular
characteristic may be found in this prospectus supplement.
- The Mortgaged Real Property Will Be the Sole Asset Available
to Satisfy the Amounts Owing Under an Underlying Mortgage Loan
in the Event of Default. All of the mortgage loans that we
intend to include in the trust are or should be considered
nonrecourse loans. If the related borrower defaults on any of
the underlying mortgage loans, only the mortgaged real
property, and none
S-42
<PAGE>
of the other assets of the borrower, is available to satisfy
the debt. Even if the related loan documents permit recourse
to the borrower or a guarantor, the trust may not be able to
ultimately collect the amount due under a defaulted mortgage
loan. None of the mortgage loans are insured or guaranteed by
any governmental agency or instrumentality or by any private
mortgage insurer. See "Risk Factors--Repayment of a Commercial
or Multifamily Mortgage Loan Depends Upon the Performance and
Value of the Underlying Real Property, Which may Decline Over
Time, and the Related Borrower's Ability to Refinance the
Property, of Which There is no Assurance--Most of the Mortgage
Loans Underlying Your Offered Certificates Will be
Nonrecourse" in the accompanying prospectus.
- In Some Cases, a Mortgaged Real Property is Dependent on a
Single Tenant or on One or a Few Major Tenants. In the case of
________ mortgaged real properties, securing ____% of the
initial mortgage pool balance, the related borrower has leased
the property to at least one tenant that occupies ____% or
more of the particular property. In the case of _____ of those
properties, securing ____% of the initial mortgage pool
balance, the related borrower has leased the particular
property to a single tenant that occupies all or substantially
all of it. Accordingly, the full and timely payment of each of
the related mortgage loans is highly dependent on the
continued operation of the major tenant or tenants, which, in
some cases, is the sole tenant, at the mortgaged real
property. See "Risk Factors--Repayment of a Commercial or
Multifamily Mortgage Loan Depends Upon the Performance and
Value of the Underlying Real Property, Which may Decline Over
Time and the Related Borrower's Ability to Refinance the
Property, of Which There is no Assurance--The Successful
Operation of a Multifamily or Commercial Property Depends on
Tenants", "--Repayment of a Commercial or Multifamily Mortgage
Loan Depends Upon the Performance and Value of the Underlying
Real Property, Which may Decline Over Time and the Related
Borrower's Ability to Refinance the Property, of Which There
is no Assurance--Dependence on a Single Tenant or a Small
Number of Tenants Makes a Property Riskier Collateral" and
"Repayment of a Commercial or Multifamily Mortgage Loan
Depends Upon the Performance and Value of the Underlying Real
Property, Which may Decline Over Time and the Related
Borrower's Ability to Refinance the Property, of Which There
is no Assurance--Tenant Bankruptcy Adversely Affects Property
Performance" in the accompanying prospectus.
- _____% or More of the Initial Mortgage Pool Balance Will Be
Secured by Mortgage Liens on Each of the Following Property
Types-[SPECIFY PROPERTY TYPES.]
[ADD DISCLOSURE RELATING TO EACH PROPERTY TYPE AS TO WHICH
THERE EXISTS A MATERIAL CONCENTRATION BASED ON CUT-OFF DATE
PRINCIPAL BALANCES OF THE UNDERLYING MORTGAGE LOANS.]
S-43
<PAGE>
The inclusion in the trust of a significant concentration of
mortgage loans that are secured by mortgage liens on a
particular type of income-producing property makes the overall
performance of the mortgage pool materially more dependent on
the factors that affect the operations at and value of that
property type. See "Description of the Trust Assets--Mortgage
Loans--A Discussion of Various Types of Multifamily and
Commercial Properties That May Secure Mortgage Loans
Underlying a Series of Offered Certificates" in the
accompanying prospectus.
- ____% or More of the Initial Mortgage Pool Balance Will be
Secured by Mortgage Liens on Real Property Located in Each of
the Following States--[SPECIFY STATES]. The mortgaged real
properties located in each of the following states secure
mortgage loans or allocated portions of mortgage loans that
represent ____% or more of the initial mortgage pool balance:
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL MORTGAGE
STATE PROPERTIES POOL BALANCE
<S> <C> <C>
</TABLE>
The inclusion of a significant concentration of mortgage loans
that are secured by mortgage liens on real properties located
in a particular state makes the overall performance of the
mortgage pool materially more depending on economic and other
conditions or events in that state. See "Risk
Factors--Geographic Concentration Within a Trust Exposes
Investors to Greater Risk of Default and Loss" in the
accompanying prospectus.
- The Mortgage Pool Will Include Adjustable Rate Mortgage Loans.
________ mortgage loans, representing ____% of the initial
mortgage pool balance, provide for adjustments to their
respective interest rates and corresponding adjustments to
their respective monthly debt service payments. See "Risk
Factors--Adjustable Rate Mortgage Loans Entail Greater Risks
of Default to Lenders than Fixed Rate Mortgage Loans" in the
accompanying prospectus.
- The Mortgage Pool Will Include Material Concentrations of
Balloon Loans and Loans With Anticipated Repayment Dates.
________ mortgage loans, representing ____% of the initial
mortgage pool balance, are balloon loans. In addition,
________ mortgage loans, representing ____% of the initial
mortgage pool balance, provide material incentives for the
related borrower to
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repay the loan by an anticipated repayment date prior to
maturity. The ability of a borrower to make the required
balloon payment on a balloon loan at maturity, and the ability
of a borrower to repay a mortgage loan on or before any
related anticipated repayment date, in each case depends upon
its ability either to refinance the loan or to sell the
mortgaged real property. Although a mortgage loan may provide
the related borrower with incentives to repay the loan by an
anticipated repayment date prior to maturity, the failure of
that borrower to do so will not be a default under that
loan. See "Description of the Mortgage Pool--Terms and
Conditions of the Underlying Mortgage Loans" in this
prospectus supplement and "Risk Factors--The Investment
Performance of Your Offered Certificates Will Depend Upon
Payments, Defaults and Losses on the Underlying Mortgage
Loans; and Those Payments, Defaults and Losses may be Highly
Unpredictable--There is an Increased Risk of Default
Associated with Balloon Payments" in the accompanying
prospectus.
- The Mortgage Pool Will Include Some Disproportionately Large
Mortgage Loans and Groups of Cross-Collateralized Mortgage
Loans. The inclusion in the mortgage pool of one or more loans
that have outstanding principal balances that are
substantially larger than the other mortgage loans can result
in losses that are more severe, relative to the size of the
mortgage pool, than would be the case if the total balance of
the mortgage pool were distributed more evenly. The
______largest mortgage loans and groups of
cross-collateralized mortgage loans to be included in the
trust represent ____% of the initial mortgage pool balance.
See "Description of the Mortgage Pool--General",
"--Cross-Collateralized Mortgage Loans, Multi-Property
Mortgage Loans and Mortgage Loans With Affiliated Borrowers"
and "--Significant Underlying Mortgage Loans" in this
prospectus supplement and "Risk Factors--Loan Concentration
Within a Trust Exposes Investors to Greater Risk of Default
and Loss" in the accompanying prospectus.
- The Mortgage Pool Will Include Leasehold Mortgage Loans.
________ mortgage loans, representing ____% of the initial
mortgage pool balance, are secured by mortgage liens on the
related borrower's leasehold interest in all or a portion of
the mortgaged real property, but not by the corresponding
ownership interest in the property that is subject to the
ground lease. Because of possible termination of the related
ground lease, lending on a leasehold interest in a real
property is riskier than lending on an actual ownership
interest in that property. See "Description of the Mortgage
Pool--Additional Loan and Property Information--Leaseholds" in
this prospectus supplement. See also "Risk Factors--Ground
Leases Create Risks for Lenders that are not Present When
Lending on an Actual Ownership Interest in a Real Property"
and "Certain Legal Aspects of Mortgage
Loans--Foreclosure--Leasehold Considerations" in the
accompanying prospectus.
- Some of the Mortgaged Real Properties Are Legal Nonconforming
Uses or Legal Nonconforming Structures.
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________ mortgage loans, representing ____% of the initial
mortgage pool balance, are secured by a mortgage lien on a
real property that is a "legal nonconforming use" or a "legal
nonconforming structure". This may impair the ability of the
borrower to restore the improvements on an mortgaged real
property to its current form or use following a major
casualty. See "Description of the Mortgage Pool--Certain
Underwriting Matters-Zoning and Building Code Compliance" in
this prospectus supplement and "Risk Factors--Changes in
Zoning may Adversely Affect the Use or Value of a Real
Property" in the accompanying prospectus.
- Some of the Mortgaged Real Properties Are Encumbered by
Subordinate Debt. ________ mortgage loans, representing ____%
of the initial mortgage pool balance, are secured by mortgaged
real properties that are known to us to be encumbered by
secured subordinate debt that is not part of the mortgage
pool. The existence of secured subordinate indebtedness may
adversely affect the borrower's financial viability and/or the
trust's security interest in the mortgaged real property. Any
or all of the following may result from the existence of
secured subordinate indebtedness on a mortgaged real property.
1. refinancing the related underlying mortgage loan at
maturity for the purpose of making any balloon
payments may be more difficult;
2. reduced cash flow could result in deferred
maintenance at the particular real property;
3. if the holder of the subordinated debt files for
bankruptcy or is placed in involuntary receivership,
foreclosing on the particular real property could be
delayed; and
4. if the mortgaged real property depreciates for
whatever reason, the related borrower's equity is
more likely to be wiped out, thereby eliminating the
related borrower's incentive to continue making
payments on its mortgage loan.
[The lender of any material subordinate debt on the mortgaged
real properties known to us, has agreed not to foreclose or
take other legal action against the particular real property
or the related borrower, for so long as the related mortgage
loan is outstanding and the trust has not done so.]
See "Description of the Mortgage Pool--Additional Loan and
Property Information--Additional and Other Financing" in this
prospectus supplement and "Risk Factors--Subordinate Debt
Increases the Likelihood That a Borrower Will Default on a
Mortgage Loan Underlying Your Offered Certificates" in the
accompanying prospectus.
- Some of the Mortgaged Real Properties Do Not Comply with the
Americans with Disabilities Act of 1990. Not all of the
mortgaged real properties securing mortgage loans that we
intend to include in the trust, comply
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with the Americans with Disabilities Act of 1990. Compliance
can be expensive. See "Risk Factors--Compliance with the
Americans with Disabilities Act of 1990 May be Expensive" in
the accompanying prospectus.
- Multiple Mortgaged Real Properties Are Owned by the Same
Borrower or Affiliated Borrowers or Are Occupied, in Whole or
in Part, by the Same Tenant or Affiliated Tenants. ________
separate groups of mortgage loans that we intend to include in
the trust, have borrowers that, in the case of each of those
groups, are the same or under common control. See "Description
of the Mortgage Pool--Cross-Collateralized Mortgage Loans,
Multi-Property Mortgage Loans and Mortgage Loans With
Affiliated Borrowers" in this prospectus supplement.
In addition, there may be tenants which lease space at more
than one mortgaged real property securing mortgage loans that
we intend to include in the trust. Furthermore, there may be
tenants that are related to or affiliated with a borrower. See
Annex A-1 to this prospectus supplement for a list of the
________ most significant tenants at each of the mortgaged
real properties used for [SPECIFY USE OF PROPERTIES].
The bankruptcy or insolvency of, or other financial problems
with respect to, any borrower or tenant that is, directly or
through affiliation, associated with two or more of the
mortgaged real properties could have an adverse effect on all
of those properties and on the ability of those properties to
produce sufficient cash flow to make required payments on the
related mortgage loans in the trust. See "Risk
Factors--Repayment of a Commercial or Multifamily Mortgage
Loan Depends upon the Performance and Value of the Underlying
Real Property, Which may Decline Over Time and the Related
Borrower's Ability to Refinance the Property, of Which There
is no Assurance--Tenant Bankruptcy Adversely Affects Property
Performance", "--Borrower Concentration Within a Trust Exposes
Investors to Greater Risk of Default and Loss" and "--Borrower
Bankruptcy Proceedings Can Delay and Impair Recovery on a
Mortgage Loan Underlying Your Offered Certificates" in the
accompanying prospectus.
- Some Borrowers Under the Underlying Mortgage Loans Will not be
Special Purpose Entities. The business activities of the
borrowers under pooled mortgage loans with cut-off date
principal balances below $______________, may not be limited
to owning their respective mortgaged real properties.
Accordingly, the financial success of each of those borrowers
may be affected by the performance of its other business
activities, including other real estate interests. Those other
business activities increase the possibility that the borrower
may become bankrupt or insolvent.
CHANGES IN MORTGAGE POOL COMPOSITION CAN CHANGE THE NATURE OF YOUR
INVESTMENT. If you purchase any of class B, C, D, E, F or X certificates other
than the class _____certificates, you will be more exposed to risks associated
with changes in
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concentrations of borrower, loan or property characteristics
than are persons who own class A-1 and class A-2 certificates. See "Risk
Factors--Changes in Pool Composition Will Change the Nature of Your Investment"
in the accompanying prospectus.
LENDING ON INCOME-PRODUCING REAL PROPERTIES ENTAILS ENVIRONMENTAL
RISKS. The trust could become liable for a material adverse environmental
condition at one of the mortgaged real properties securing the mortgage loans in
the trust. Any potential environmental liability could reduce or delay payments
on the offered certificates.
A third-party consultant conducted an environmental site assessment, or
updated a previously conducted assessment, with respect to ________ of the
mortgaged real properties for the underlying mortgage loans, during the
_____-month period ending on ______________. Each of those environmental site
assessments or updates, as the case may be, complied with industry-wide
standards. Not all of those environmental site assessments, however, satisfied
all the requirements necessary to be considered a Phase I environmental site
assessment. In ________ cases, a third-party consultant also conducted a Phase
II environmental site assessment of a mortgaged real property. If any
assessment or update revealed a material adverse environmental condition or
circumstance at any mortgaged real property and the consultant recommended
action, then, depending on the nature of the condition or circumstance, the
borrower has--
- implemented or agreed to implement an operations and
maintenance plan, in the manner and within the time frames
specified in the related loan documents;
- agreed to monitor periodically nearby properties, in the
manner and within the time frames specified in the related
loan documents; or
- established a reserve account with the lender to cover the
estimated cost of addressing the condition or circumstances.
In many cases, the identified condition related to the presence of
asbestos-containing materials, lead-based paint and/or radon. Where these
substances were present, the environmental consultant generally recommended, and
the related loan documents required, the establishment of an operation and
maintenance plan to address the issue or, in the case of asbestos-containing
materials and lead-based paint, an abatement or removal program. In ________
cases, the particular asbestos-containing materials or lead-based paint was in
poor condition. This could result in a claim for damages by any party injured by
that condition.
In ________ cases, the cost to remediate, prevent or otherwise deal
with an adverse environmental condition at a mortgaged real property securing a
mortgage loan that we intend to include in the trust, was estimated to be more
than [$50,000].
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[In ________ cases, the environmental consultant did not recommend that
any action be taken with respect to a potential adverse environmental condition
at a mortgaged real property securing a mortgage loan that we intend to include
in the trust, because a responsible party with respect to that condition had
already been identified.]
[In the case of ________ mortgaged real properties, securing ____% of
the initial mortgage pool balance, either-
- no environmental site assessment was conducted in connection
with the origination of the related underlying mortgage loan,
or
- a Phase II environmental site assessment was recommended but
not performed.]
See "Risk Factors--Environmental Liabilities Will Adversely Affect the
Value and Operation of the Contaminated Property and May Deter a Lender from
Foreclosing" and "Certain Legal Aspects of Mortgage Loans--Environmental
Considerations" in the accompanying prospectus.
LENDING ON INCOME-PRODUCING PROPERTIES ENTAILS RISKS RELATED TO
PROPERTY CONDITION. Licensed engineers inspected ________ of the mortgaged real
properties of the mortgage loans that we intend to include in the trust, during
the _____-month period preceding the cut-off date, to assess--
- the structure, exterior walls, roofing, interior construction,
mechanical and electrical systems, and
- the general condition of the site, buildings and other
improvements located at each property.
At ________ of those properties, the inspections identified conditions requiring
escrows to be established for repairs or replacements estimated to cost in
excess of [$100,000].
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In ________ of these cases, the originator required the
related borrower to fund reserves, or deliver letters of credit or other
instruments, to cover these costs.
LIMITATIONS ON ENFORCEABILITY OF CROSS-COLLATERALIZATION. The mortgage
pool will include ________ mortgage loans that are secured, including through
cross-collateralization with other mortgage loans, by multiple mortgaged real
properties. These mortgage loans are identified in the tables contained in Annex
A-1. The purpose of securing any particular mortgage loan or group of
cross-collateralized mortgage loans with multiple real properties is to reduce
the risk of default or ultimate loss as a result of an inability of any
particular property to generate sufficient net operating income to pay debt
service. [However, ________ of these mortgage loans permit--
- the release of one or more of the mortgaged real properties
from the related mortgage lien, and/or
- a full or partial termination of the applicable
cross-collateralization, in each case, upon the satisfaction
of the conditions described under "Description of the Mortgage
Pool--Terms and Conditions of the Mortgage Loans" in this
prospectus supplement.]
In addition, when multiple real properties secure a mortgage loan or
group of cross-collateralized mortgage loans, the amount of the mortgage
encumbering any particular one of those properties may be less than the full
amount of the related mortgage loan or group of cross-collateralized mortgage
loans, generally to avoid recording tax. This mortgage amount may equal the
appraised value or allocated loan amount for the mortgaged real property and
will limit the extent to which proceeds from the property will be available to
offset declines in value of the other properties securing the same mortgage loan
or group of cross-collateralized mortgage loans.
________ mortgage loans that we intend to include in the trust are, in
each case, secured by real properties located in two or more states. These
mortgage loans represent ____% of the initial mortgage pool balance. Foreclosure
actions are brought in state court and the courts of one state cannot exercise
jurisdiction over property in another state. Upon a default under any of these
mortgage loans, it may not be possible to foreclose on the related mortgaged
real properties simultaneously.
LIMITED INFORMATION CAUSES UNCERTAINTY. ________ of the mortgage loans
that we intend to include in the trust, are acquisition financing. Accordingly,
limited or no operating information is available with respect to the mortgaged
real properties for those mortgage loans. As a result, you may find it difficult
to analyze the performance of those properties.
[PRIOR BANKRUPTCIES. We are aware that, in the case of ________
mortgage loans that we intend to include in the trust--
- the related borrower or a principal in the related borrower
has been a party to, or
- the related mortgaged real property has been the subject of,
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prior bankruptcy proceedings.]
CAPITALIZED TERMS USED IN THIS PROSPECTUS SUPPLEMENT
From time to time we use capitalized terms in this prospectus
supplement. Each of those capitalized terms will have the meaning assigned to
it in the "Glossary" attached to this prospectus supplement.
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus includes the
words "expects", "intends", "anticipates", "estimates" and similar words and
expressions. These words and expressions are intended to identify forward-
looking statements. Any forward-looking statements are made subject to risks and
uncertainties which could cause actual results to differ materially from those
stated. These risks and uncertainties include, among other things, declines in
general economic and business conditions, increased competition, changes in
demographics, changes in political and social conditions, regulatory initiatives
and changes in customer preferences, many of which are beyond our control and
the control of any other person or entity related to this offering. The
forward-looking statements made in this prospectus supplement are accurate as of
the date stated on the cover of this prospectus supplement. We have no
obligation to update or revise any forward-looking statement.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
We intend to include the ________ mortgage loans identified on Annex
A-1 to this prospectus supplement in the trust. The mortgage pool consisting of
those loans will have an initial mortgage pool balance of $___________. However,
the actual initial mortgage pool balance may be as much as ____% smaller or
larger than that amount if any of those mortgage loans are removed from the
mortgage pool or any other mortgage loans are added to the mortgage pool. See
"--Changes in Mortgage Pool Characteristics" below.
The initial mortgage pool balance will equal the total cut-off date
principal balance of the mortgage loans included in the trust. The cut-off date
principal balance of any mortgage loan is equal to its unpaid principal balance
as of the cut-off date, after application of all monthly debt service payments
due with respect to the mortgage loan on or before that date, whether or not
those payments were received. The cut-off date principal balance of each
mortgage loan that we intend to include in the trust is shown on Annex A-1 to
this prospectus supplement. Those cut-off date
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principal balances range from $_________ to $__________, and the average of
those cut-off date principal balances is $_________.
Each of the mortgage loans that we intend to include in the trust is an
obligation of the related borrower to repay a specified sum with interest. Each
of those mortgage loans is evidenced by a promissory note and secured by a
mortgage, deed of trust or other similar security instrument that creates a
mortgage lien on the ownership and/or leasehold interest of the related borrower
or another party in one or more commercial or multifamily real properties. That
mortgage lien will, in all cases, be a first priority lien, subject only to
Permitted Encumbrances.
You should consider each of the pooled mortgage loans to be a
nonrecourse obligation of the related borrower. In the event of a payment
default by the related borrower, recourse will be limited to the corresponding
mortgaged real property or properties for satisfaction of that borrower's
obligations. In those cases where recourse to a borrower or guarantor is
permitted under the related loan documents, we have not undertaken an evaluation
of the financial condition of any of
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these persons. None of the pooled mortgage loans will be insured or guaranteed
by any governmental entity or by any other person.
We provide in this prospectus supplement a variety of information
regarding the mortgage loans that we intend to include in the trust. When
reviewing this information, please note that--
- All numerical information provided with respect to the
mortgage loans is provided on an approximate basis.
- All weighted average information provided with respect to the
mortgage loans reflects a weighting by their respective
cut-off date principal balances.
- When information with respect to mortgaged real properties is
expressed as a percentage of the initial mortgage pool
balance, the percentages are based upon the cut-off date
principal balances of the related mortgage loans.
- If a mortgage loan is secured by multiple mortgaged real
properties located in more than one state, a portion of that
mortgage loan has been allocated to each of those properties.
- Statistical information regarding the mortgage loans may
change prior to the date of initial issuance of the offered
certificates due to changes in the composition of the mortgage
pool prior to that date.
CROSS-COLLATERALIZED MORTGAGE LOANS, MULTI-PROPERTY MORTGAGE LOANS AND MORTGAGE
LOANS WITH AFFILIATED BORROWERS
The mortgage pool will include ________ mortgage loans that are, in
each case, individually or through cross-collateralization with other mortgage
loans, secured by two or more real properties. [However, the amount of the
mortgage lien encumbering any particular one of those properties may be less
than the full amount of the related mortgage loan or group of
cross-collateralized mortgage loans, generally to avoid recording tax. The
mortgage amount may equal the appraised value or allocated loan amount for the
particular real property. This would limit the extent to which proceeds from
that property would be available to offset declines in value of the other
mortgaged real properties securing the same mortgage loan or group of
cross-collateralized mortgage loans.]
________ of the mortgage loans referred to in the prior paragraph
entitle the related borrower(s) to obtain a release of one or more of the
corresponding mortgaged real properties and/or a termination of any applicable
cross-collateralization, subject, in each case, to the fulfillment of one or
more of the following conditions--
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- the pay down of the mortgage loan(s) in an amount equal to a
specified percentage, which is usually ____%, of the portion
of the total loan amount allocated to the property or
properties to be released;
- the satisfaction of debt service coverage and loan-to-value
tests for the property or properties that will remain as
collateral; and/or
- receipt by the lender of confirmation from each applicable
rating agency that the action will not result in a
qualification, downgrade or withdrawal of any of the
then-current ratings of the offered certificates.
In addition, ________ of the mortgage loans referred to in the prior paragraph
also entitle the related borrower to a release of one or more of the
corresponding mortgaged real properties through defeasance. See "--Certain Terms
and Conditions of the Mortgage Loans--Defeasance Loans" below.
The table below identifies each group of mortgaged real properties that
secure an individual multi-property mortgage loan or a group of
cross-collateralized mortgage loans that represent at least ____% of the initial
mortgage pool balance.
<TABLE>
<CAPTION>
NUMBER OF STATES % OF
WHERE THE INITIAL
PROPERTIES ARE MORTGAGE
PROPERTY NAMES LOCATED POOL BALANCE
<S> <C> <C>
</TABLE>
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The table below shows each group of mortgaged real properties that:
- are owned by the same or affiliated borrowers; and
- secure two or more non-cross-collateralized mortgage loans
that represent at least ____% of the initial mortgage pool
balance.
<TABLE>
<CAPTION>
NUMBER OF STATES
WHERE THE % OF
PROPERTIES ARE INITIAL MORTGAGE
PROPERTY NAMES LOCATED POOL BALANCE
<S> <C> <C>
</TABLE>
CERTAIN TERMS AND CONDITIONS OF THE UNDERLYING MORTGAGE LOANS
DUE DATES. All of the mortgage loans that we intend to include in the
trust provide for monthly debt service payments to be due on the _____ day of
each month.
MORTGAGE RATES; CALCULATIONS OF INTEREST. In general, each of the
mortgage loans that we intend to include in the trust bears interest at a
mortgage interest rate that, in the absence of default, is fixed until maturity.
However, as described below under "--ARD Loans, each of those mortgage loans
that has an anticipated repayment date will accrue interest after that date at a
rate that is in excess of its mortgage interest rate prior to that date. [IF ANY
OF THE MORTGAGE LOANS HAVE FLOATING OR ADJUSTABLE MORTGAGE INTEREST RATES,
DISCUSS CALCULATION OF THOSE RATES, INCLUDING INDICES, GROSS MARGINS, ADJUSTMENT
DATES, FLOORS AND CAPS.]
The mortgage interest rate for each of the mortgage loans that we
intend to include in the trust is shown on Annex A-1 to this prospectus
supplement. As of the cut-off date, those mortgage interest rates ranged from
____% per annum to ____% per annum, and the weighted average of those mortgage
interest rates was ____% per annum.
Except in the case of mortgage loans with anticipated repayment dates,
none
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of the mortgage loans that we intend to include in the trust provides for
negative amortization or for the deferral of interest. [DESCRIBE ANY POTENTIAL
NEGATIVE AMORTIZATION.]
Each of the pooled mortgage loans will accrue interest on the basis of
one of the following conventions:
- the actual number of days elapsed during each one-month
accrual period in a year of 360 days; or
- a 360-day year consisting of twelve 30-day months; or
- [SPECIFY ANY OTHER BASIS].
The table below shows the number of, and percentage of initial mortgage
pool balance represented by, mortgage loans that accrue interest based on each
of the foregoing conventions.
<TABLE>
<CAPTION>
% OF
NUMBER OF INITIAL MORTGAGE
INTEREST ACCRUAL BASIS MORTGAGE LOANS POOL BALANCE
<S> <C> <C>
Actual/360 Basis %
30/360 Basis %
[OTHER] %
</TABLE>
BALLOON LOANS. ________ of the mortgage loans that we intend to include
in the trust, representing ____% of the initial mortgage pool balance, are
characterized by--
- an amortization schedule that is significantly longer than the
actual term of the mortgage loan, and
- a substantial payment being due with respect to the mortgage
loan on its stated maturity date.
ARD LOANS. ________ of the mortgage loans that we intend to include in
the trust, representing ____% of the initial mortgage pool balance, are
characterized by the following features:
- A maturity date that is more than _____ years following
origination.
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- The designation of an anticipated repayment date that is
generally _____ years following origination. The anticipated
repayment date for each of the ARD Loans is listed on Annex
A-1 to this prospectus supplement.
- The ability of the related borrower to prepay the mortgage
loan, without restriction, including without any obligation to
pay a prepayment premium or a yield maintenance charge, at any
time on or after a date that is generally _____ to _____
months] prior to the related anticipated repayment date.
- Until its anticipated repayment date, the calculation of
interest at its initial mortgage interest rate.
- From and after its anticipated repayment date, the accrual of
interest at a revised annual rate that is, in most cases,
equal to the sum of--
1. its initial mortgage interest rate, plus
2. a specified margin that is, in ________ cases, not
more than _____ percentage points.
- The deferral of any additional interest accrued with respect
to the mortgage loan from and after the related anticipated
repayment date at the difference between its revised mortgage
interest rate and its initial mortgage interest rate. This
post-anticipated repayment date additional interest may, in
some cases, compound at the new revised mortgage interest
rate. Any post-anticipated repayment date additional interest
accrued with respect to the mortgage loan following its
anticipated repayment date will not be payable until the
entire principal balance of the mortgage loan has been paid in
full.
- From and after its anticipated repayment date, the accelerated
amortization of the mortgage loan out of any and all monthly
cash flow from the corresponding mortgaged real property which
remains after payment of the applicable monthly debt service
payments and permitted operating expenses and capital
expenditures. These accelerated amortization payments and the
post-anticipated repayment date additional interest are
considered separate from the monthly debt service payments due
with respect to the mortgage loan.
In the case of each of the ARD Loans that we intend to include in the
trust, the related borrower has agreed to enter into a cash management agreement
not less than _____ months prior to the related anticipated repayment date if it
has not already done so. The related borrower or the
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manager of the corresponding mortgaged real property will be required under the
terms of that cash management agreement to deposit or cause the deposit of all
revenue from that property received after the related anticipated repayment date
into a designated account controlled by the lender under the ARD Loan.
FULLY AMORTIZING LOANS. ________ of the mortgage loans that we intend
to include in the trust, representing ____% of the initial mortgage pool
balance, are characterized by--
- constant monthly debt service payments throughout the
substantial term of the mortgage loan, and
- an amortization schedule that is approximately equal to the
actual term of the mortgage loan.
However, none of these fully amortizing loans has either--
- an anticipated repayment date, or
- the associated repayment incentives.
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AMORTIZATION OF PRINCIPAL. The table below shows, in months, the
original and, as of the cut-off date, the remaining amortization schedules and
terms to maturity for the mortgage loans that we expect to back the offered
certificates or the specified sub-groups of those mortgage loans. For purposes
of the following table, the ARD Loans are assumed to mature on their respective
anticipated repayment dates.
<TABLE>
<CAPTION>
FULLY AMORTIZING ALL
BALLOON LOANS ARD LOANS LOANS MORTGAGE LOANS
<S> <C> <C> <C> <C>
Original Term to Maturity (mos.)
Maximum
Minimum
Weighted Average
Remaining Term to Maturity (mos.)
Maximum
Minimum
Weighted Average
Original Amortization Term (mos.)
Maximum
Minimum
Weighted Average
Remaining Amortization Term (mos.)
Maximum
Minimum
Weighted Average
</TABLE>
Some of the pooled mortgage loans will, in each case, provide for a
recast of the amortization schedule and an adjustment of the monthly debt
service payments on the mortgage loan upon application of specified amounts of
condemnation proceeds or insurance proceeds to pay the related unpaid principal
balance.
[DISCUSS ANY ADJUSTMENTS TO THE MONTHLY DEBT SERVICE PAYMENTS FOR THE MORTGAGE
LOANS.]
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VOLUNTARY PREPAYMENT PROVISIONS. In general, at origination, the
mortgage loans that we intend to include in the trust, provided for:
- a prepayment lock-out period, during which voluntary principal
prepayments are prohibited, followed by
- a prepayment consideration period, during which voluntary
prepayments are permitted, subject to the payment of an
additional consideration for the prepayment, followed by
- an open prepayment period, during which voluntary principal
prepayments may be made without any prepayment consideration.
Notwithstanding otherwise applicable lock-out periods, partial
prepayments of some of the pooled mortgage loans will be required under the
circumstances described under "--Certain Terms and Conditions of the Underlying
Mortgage Loans--Other Prepayment Provisions" below.
The prepayment terms of each of the mortgage loans that we intend to
include in the trust are more particularly described in Annex A-1 to this
prospectus supplement.
As described below under "--Defeasance Loans", [substantially all] of
the pooled mortgage loans will permit the related borrower to obtain a full or
partial release of the corresponding mortgaged real property from the related
mortgage lien by delivering U.S. government securities as substitute collateral.
None of these mortgage loans will permit defeasance prior to the _____
anniversary of the date of initial issuance of the offered certificates.
PREPAYMENT LOCK-OUT PERIODS. ________ of the mortgage loans that we
intend to include in the trust, representing ____% of the initial mortgage pool
balance, provide for prepayment lock-out periods as of the cut-off date, and-
- the maximum remaining prepayment lock-out period of those
mortgage loans as of that date is _____ months,
- the minimum remaining prepayment lock-out period of those
mortgage loans as of that date is _____ months, and
- the weighted average remaining prepayment lock-out period of
those mortgage loans as of that date is _____ months.
Notwithstanding otherwise applicable lock-out periods, partial
prepayments of some of the pooled mortgage loans will be required under the
circumstances described under "--Terms and Conditions of the Underlying
Mortgage Loans--Other Prepayment Provisions" below.
PREPAYMENT CONSIDERATION. Following an initial prepayment lock-out
period, ________ of the mortgage loans that we intend to include in the trust,
representing ____% of the initial mortgage pool
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balance, provide for the payment of prepayment consideration in connection with
a voluntary prepayment during part of the loan term. That prepayment
consideration will equal [SPECIFY CALCULATION OF PREPAYMENT CONSIDERATION].
Prepayment premiums and yield maintenance charges received on the
pooled mortgage loans, whether in connection with voluntary or involuntary
prepayments, will be allocated and paid to the persons, in the amounts and in
accordance with the priorities described under "Description of the Offered
Certificates--Payments--Payments of Prepayment Premiums and Yield Maintenance
Charges" in this prospectus supplement. Limitations may exist under applicable
state law on the enforceability of the provisions of the pooled mortgage loans
that require payment of prepayment premiums or yield maintenance charges.
Neither we nor the underwriter makes any representation or warranty as to the
collectability of any prepayment premium or yield maintenance charge with
respect to any of the mortgage loans included in the trust. See "Risk
Factors--Some Provisions in the Mortgage Loans Underlying Your Offered
Certificates may be Challenged as Being Unenforceable--Prepayment Premiums, Fees
and Charges" and "Legal Aspects of Mortgage Loans--Default Interest and
Limitations on Prepayments" in the accompanying prospectus.
OPEN PREPAYMENT PERIODS. ________ of the mortgage loans that we intend
to include in the trust, representing ____% of the initial mortgage pool
balance, provide for an open prepayment period. That open prepayment period
generally begins _____ to _____ months prior to stated maturity [or, in the case
of an ARD Loan, prior to the related anticipated repayment date].
OTHER PREPAYMENT PROVISIONS. ________ of the mortgage loans that we
intend to include in the trust provide for mandatory partial prepayments,
notwithstanding any lock-out period that may otherwise be in effect. In ________
of these cases, the related borrower has established reserves or delivered a
letter of credit that will be applied to a partial prepayment of the mortgage
loan if one or more property performance conditions do not occur.
Investors should not expect any prepayment consideration to be paid in
connection with any mandatory partial prepayment described in the prior
paragraph.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS. ________ of the
mortgage loans that we intend to include in the trust, representing ____% of the
initial mortgage pool balance, contain both a due-on-sale clause and a
due-on-encumbrance clause. In general, except for the permitted transfers
discussed in the next paragraph, these clauses either--
- permit the holder of the related mortgage to accelerate the
maturity of the mortgage loan if the borrower sells or
otherwise transfers or encumbers the corresponding mortgaged
real property, or
- prohibit the borrower from doing so without the consent of the
holder of the mortgage.
See, however, "Risk Factors-The Investment Performance of Your Offered
Certificates Will Depend upon Payments, Defaults and Losses on the Underlying
Mortgage Loans; and
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Those Payments, Defaults and Losses may be Highly Unpredictable--Delinquencies,
Defaults and Losses on the Underlying Mortgage Loans may Affect the Amount and
Timing of Payments on Your Offered Certificates; and the Rate and Timing of
Those Delinquencies and Defaults, and the Severity of Those Losses, are Highly
Unpredictable" and "--Some Provisions in the Mortgage Loans Underlying Your
Offered Certificates may be Challenged as Being Unenforceable--Due-on-Sale and
Debt Acceleration Clauses" and "Legal Aspects of Mortgage Loans-Due on Sale
and Due-on-Encumbrance Provisions" in the accompanying prospectus.
________ of the mortgage loans that we intend to include in the trust
permit one or more of the following types of transfers:
- transfers of the corresponding mortgaged real property if
specified conditions are satisfied, which conditions normally
include-
1. confirmation by each applicable rating agency that
the transfer will not result in a qualification,
downgrade or withdrawal of any of its then current
ratings of the certificates, or
2. the reasonable acceptability of the transferee to the
lender;
- a transfer of the corresponding mortgaged real property to a
person that is affiliated with or otherwise related to the
borrower;
- transfers by the borrower of the corresponding mortgaged real
property to specified entities or types of entities; or
- a transfer of non-controlling ownership interests in the
related borrower.
DEFEASANCE LOANS. ________ of the mortgage loans that we intend to
include in the trust, representing ____% of the initial mortgage pool balance,
permit the borrower to deliver U.S. government securities as substitute
collateral.
Each of these mortgage loans permits the related borrower, during
specified periods and subject to specified conditions, to pledge to the holder
of the mortgage loan the requisite amount of direct, non-callable U.S.
government securities and obtain a full or partial release of the mortgaged real
property. In general, the U.S. government securities that are to be delivered in
connection with the defeasance of any mortgage loan, must provide for a series
of payments that--
- will be made prior, but as closely as possible, to all
successive due dates through and including the maturity date,
and
- will, in the case of each due date, be in a total amount equal
to or greater than the monthly debt service payment, including
any applicable balloon
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payment, scheduled to be due on that date, with any excess to
be returned to the related borrower.
[For purposes of determining the defeasance collateral for an ARD Loan,
however, that mortgage loan will be treated as if a balloon payment is due on
its anticipated repayment date.]
If fewer than all of the real properties securing any particular
mortgage loan or group of cross-collateralized mortgage loans are to be released
in connection with any defeasance, the requisite defeasance collateral will be
calculated based on the allocated loan amount for the properties to be released
and the portion of the monthly debt service payments attributable to that
allocated loan amount.
In connection with any delivery of defeasance collateral, the related
borrower will be required to deliver a security agreement granting the trust a
first priority security interest in the collateral, together with an opinion of
counsel confirming the first priority status of the security interest.
None of the mortgage loans that we intend to include in the trust may
be defeased prior to the _____ anniversary of the date of initial issuance of
the certificates.
MORTGAGE POOL CHARACTERISTICS
GENERAL. A detailed presentation of various characteristics of the
mortgage loans that we intend to include in the trust, and of the corresponding
mortgaged real properties, on an individual basis and in tabular format, is
shown on Annex A-1 and Annex A-2 to this prospectus supplement. Some of the
terms that appear in those exhibits, as well as elsewhere in this prospectus
supplement, are defined or otherwise discussed in the "Glossary" to this
prospectus supplement. The statistics in the tables and schedules on Annex A-1
and Annex A-2 to this prospectus supplement were derived, in many cases, from
information and operating statements furnished by or on behalf of the respective
borrowers. The information and the operating statements were generally unaudited
and have not been independently verified by us or the underwriter.
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SIGNIFICANT MORTGAGE LOANS
[INSERT DESCRIPTION OF SIGNIFICANT MORTGAGE LOANS.]
ADDITIONAL LOAN AND PROPERTY INFORMATION
DELINQUENCIES. None of the mortgage loans that we intend to include in
the trust was as of the cut-off date, or has been at any time during the
______-month period preceding that date, _____ days or more delinquent with
respect to any monthly debt service payment.
TENANT MATTERS. Described and listed below are special considerations
regarding tenants at the mortgaged real properties for the mortgage loans that
we intend to include in the trust-
- [________ of the mortgaged real properties, securing ____% of
the initial mortgage pool balance, are, in each case, a
[SPECIFY PROPERTY TYPES] that is leased to one or more major
tenants that each occupy at least ____% of the net rentable
area of the particular property.
- A number of companies are major tenants at more than one of
the mortgaged real properties.
- There are ________ cases in which a particular entity is a
tenant at more than one of the mortgaged real properties, and
although it may not be a major tenant at any of those
properties, it is significant to the success of the
properties.
- ________ of the mortgaged real properties, securing ____% of
the initial mortgage pool balance, are multifamily rental
properties that have material concentrations of student
tenants.]
[GROUND LEASES. ________ of the mortgage loans that we intend to
include in the trust, representing ____% of the initial mortgage pool balance,
are secured, in whole or in material part, by a mortgage lien on the borrower's
leasehold interest in the corresponding mortgaged real property. In each case,
the related ground lease, giving effect to all extension options, expires more
than ten years after the stated maturity of the related mortgage loan and
either:
- the ground lessor has subordinated its interest in the
mortgaged real property to the interest of the holder of that
mortgage loan; or
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- the ground lessor has agreed to give the holder of that
mortgage loan notice of, and the right to cure, any default or
breach by the lessee.]
[SPECIFY EXCEPTIONS.]
See "Risk Factors-Ground Leases Create Risks for Lenders That Are Not
Present When Lending on an Actual Ownership Interest in a Real Property" and
"Legal Aspects of Mortgage Loans-Foreclosure-Leasehold Considerations" in the
accompanying prospectus.
[ADDITIONAL AND OTHER FINANCING. We are aware of ________ mortgaged
real properties, securing ____% of the initial mortgage pool balance, that are
encumbered by secured subordinate debt that is not part of the mortgage pool.
The following table identifies those properties, indicates the initial principal
amount of the secured subordinate debt and sets forth the cut-off date principal
balances of the related mortgage loans. [In the case of each of those
properties, the subordinate lender has entered into a subordination and
standstill agreement with the holder of the related mortgage loan whereby that
subordinate lender-
- expressly subordinated its right to receive collections and
proceeds from, and otherwise deal with, that property, and
- agrees not to take any enforcement or other legal action
against that property or the related borrower as long as the
corresponding pooled mortgage loan is outstanding and the
mortgagee under that mortgage loan has not taken any similar
enforcement or other legal action.]
<TABLE>
<CAPTION>
% OF INITIAL
CUT-OFF DATE MORTGAGE POOL
PRINCIPAL BALANCE BALANCE REPRESENTED INITIAL PRINCIPAL
OF RELATED BY RELATED AMOUNT OF SECURED
NAMES MORTGAGE LOANS MORTGAGE LOANS SUBORDINATE DEBT
<S> <C> <C> <C>
</TABLE>
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[In addition, we are aware that the borrowers under ________ of the
mortgage loans that we intend to include in the trust, representing ____% of the
initial mortgage pool balance, have unsecured debt. In ________ of those cases,
the lender on the debt is an affiliate of the borrower. In ________ of those
cases, the lender on the unsecured debt has executed and delivered a
subordination and standstill agreement in favor of the mortgagee under the
corresponding pooled mortgage loan. In addition, some of the pooled mortgage
loans will permit the related borrower to incur unsecured subordinated debt in
the future, subject to conditions such as-
- limiting the use of proceeds to refurbishing or renovating the
mortgaged real property, and/or
- acquiring furniture, fixtures and equipment for the mortgaged
real property.
Borrowers that do not meet special purpose entity, bankruptcy-remote criteria,
generally do not have any restriction on the incurrence of unsecured debt.
Additional debt, in any form, may cause a diversion of funds from property
maintenance and increase the likelihood that the borrower will become the
subject of a bankruptcy proceeding.] See "Risk Factors-Subordinate Debt
Increases the Likelihood That a Borrower Will Default on a Mortgage Loan
Underlying Your Offered Certificates" and "Legal Aspects of Mortgage
Loans-Subordinate Financing" in the accompanying prospectus.
Except as disclosed under this "-Additional and Other Financing"
subsection, we have not been able to confirm whether the respective borrowers
under the mortgage loans that we intend to include in the trust, have any other
debt outstanding.
ZONING AND BUILDING CODE COMPLIANCE. In connection with the origination
of each mortgage loan that we intend to include in the trust, the related
originator examined whether the use and operation of the mortgaged real property
were in material compliance with zoning, land-use, building, fire and health
ordinances, rules, regulations and orders then-applicable to that property.
Evidence of this compliance may have been in the form of legal opinions,
certifications from government officials, title insurance endorsements,
engineering or consulting reports and/or representations by the related
borrower. In ________ cases, a certificate of occupancy was not available. Where
the property as currently operated is a permitted nonconforming use and/or
structure, an analysis was generally conducted as to-
- the likelihood that a material casualty would occur that would
prevent the property from being rebuilt in its current form,
and
- whether existing replacement cost hazard insurance or, if
necessary, supplemental law or ordinance coverage would, in
the event of a material casualty, be sufficient-
1. to satisfy the entire mortgage loan, or
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2. taking into account the cost of repair, to pay down
the mortgage loan to a level that the remaining
collateral would be adequate security for the
remaining loan amount.
HAZARD, LIABILITY AND OTHER INSURANCE. [Although exceptions exist, the
loan documents for each of the mortgage loans that we intend to include in the
trust generally require the related borrower to maintain with respect to the
corresponding mortgaged real property the following insurance coverage-
- hazard insurance in an amount that is, subject to a customary
deductible, at least equal to the lesser of-
1. the outstanding principal balance of the mortgage
loan, and
2. the full insurable replacement cost of the
improvements located on the insured property;
- if any portion of the property was in an area identified in
the federal register by the Flood Emergency Management Agency
as having special flood hazards, flood insurance meeting the
requirements of the Federal Insurance Administration
guidelines, in an amount that is equal to the least of-
1. the outstanding principal balance of the related
mortgage loan,
2. the full insurable value of the insured property, and
3. the maximum amount of insurance available under the
National Flood Insurance Act of 1968;
- comprehensive general liability insurance against claims for
personal and bodily injury, death or property damage occurring
on, in or about the insured property, in an amount at least
equal to $________ per occurrence; and
- business interruption or rent loss insurance either in an
amount not less than 100% of the projected rental income or
revenue from the insured property for at least six months or,
alternatively, in a specified dollar amount.]
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[In general, the mortgaged real properties for the mortgage loans that
we intend to include in the trust, including those properties located in
California, are not insured against earthquake risks. In the case of those
properties located in California, other than those that are manufactured housing
communities or self storage facilities, a third party consultant conducted
seismic studies to assess the probable maximum loss for the property. In
general, when the resulting reports concluded that a mortgaged real property was
likely to experience a probable maximum loss in excess of 20% of the estimated
replacement cost of the improvements, the related originator required the
borrower to-
- obtain earthquake insurance, or
- establish reserves to cover the estimated costs of completing
seismic retrofitting recommended by the consultant,
unless, in any case, the original loan-to-value ratio was relatively low.]
[With respect to each of the mortgaged real properties for the pooled
mortgage loans, the master servicer is required to cause the maintenance of all
insurance coverage as is required under the related mortgage, to the extent-
- the trust has an insurable interest, and
- the master servicer can require maintenance of the insurance
under applicable law.]
[Where insurance coverage at the mortgaged real property for any pooled
mortgage loan is left to the lender's discretion, the master servicer will be
required to use reasonable efforts to cause the related borrower to maintain
insurance generally in the amounts, type and scopes of coverage required under
the other pooled mortgage loans.]
[Various forms of insurance maintained with respect to any of the
mortgaged real properties for the pooled mortgage loans, including casualty
insurance, environmental insurance and earthquake insurance, may be provided
under a blanket insurance policy. That blanket insurance policy will also cover
other real properties, some of which may not secure loans in the trust. As a
result of total limits under any of those blanket policies, losses at other
properties covered by the blanket insurance policy may reduce the amount of
insurance coverage with respect to a property securing one of the loans in the
trust. See "Risk Factors-Lack of Insurance Coverage Exposes a Trust to Risk for
Special Hazard Losses" in the accompanying prospectus.]
[With limited exception, the mortgage loans that we intend to include
in the trust generally provide that insurance and condemnation proceeds are to
be applied either-
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- to restore the mortgaged real property; or
- towards payment of the mortgage loan.]
[If any mortgaged real property is acquired by the trust through
foreclosure, deed in lieu of foreclosure or otherwise following a default on the
related mortgage loan, the special servicer will be required to maintain for
that property generally the same types of insurance policies providing coverage
in the same amounts as were previously required under the mortgage that had
covered the property.]
[The master servicer and the special servicer may each satisfy its
obligations regarding maintenance of the hazard insurance policies referred to
in this prospectus supplement by maintaining a blanket insurance policy insuring
against hazard losses on all of the pooled mortgage loans for which it is
responsible. If any blanket insurance policy maintained by the master servicer
or special servicer contains a deductible clause, however, the master servicer
or the special servicer, as the case may be, will be required, in the event of a
casualty covered by that policy, to pay out of its own funds all sums that-
- are not paid because of the deductible clause, and
- would have been paid if an individual hazard insurance policy
referred to above had been in place.]
[The applicable originator and its successors and assigns are the
beneficiaries under separate title insurance policies with respect to each
mortgage loan that we intend to include in the trust. Each title insurer will
enter into co-insurance and reinsurance arrangements with respect to the title
insurance policy as are customary in the title insurance industry. Subject to
standard exceptions, including those regarding claims made in the context of
insolvency proceedings, each title insurance policy will provide coverage to the
trustee for the benefit of the series _____ certificateholders for claims made
against the trustee regarding the priority and validity of the borrowers' title
to the subject mortgaged real property.]
ASSESSMENTS OF PROPERTY CONDITION
PROPERTY INSPECTIONS. [______ of the mortgaged real properties for the
mortgage loans that we intend to include in the trust, were each inspected in
connection with the origination or acquisition of the related mortgage loan to
assess their general condition.] [DISCUSS RESULTS AND CORRESPONDING ACTIONS.]
APPRAISALS. [________ of the mortgaged real properties for the mortgage
loans that we intend to include in the trust, were appraised by a state
certified appraiser or an appraiser belonging to the Appraisal Institute. Those
appraisals were conducted in accordance with the Uniform Standards of
Professional Appraisal Practices.] [In general, the appraisal for each of those
properties or a separate letter contains a statement by the appraiser stating
that the guidelines in Title XI of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 were followed in preparing the appraisal.]
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We have not independently verified the accuracy of that statement with respect
to any of those properties. The primary purpose of each of those appraisals was
to provide an opinion of the fair market value of the related mortgaged real
property. There can be no assurance that another appraiser would have arrived at
the same opinion of value. The resulting appraised values are shown on Annex A-1
to this prospectus supplement.
ENVIRONMENTAL ASSESSMENTS. [A Phase I environmental site assessment
was performed with respect to ________ of the mortgaged real properties for the
mortgage loans that we intend to include in the trust. Each of those
environmental site assessments was conducted in connection with the origination
of the related mortgage loan. In ________ cases, additional environmental
testing, as recommended by that Phase I assessment, was performed.] [DISCUSS
RESULTS AND CORRESPONDING ACTIONS.]
ENGINEERING ASSESSMENTS. [In connection with the origination of the
related mortgage loans that we intend to include in the trust, a licensed
engineer inspected ________ of the mortgaged real properties to assess the
structure, exterior walls, roofing, interior structure and mechanical and
electrical systems.] [DISCUSS RESULTS AND CORRESPONDING ACTIONS.]
THE MORTGAGE LOAN SELLERS
We did not originate any of the mortgage loans that we intend to
include in the trust. We will acquire those mortgage loans from the following
entities:
- ______________________ - _________ mortgage loans,
representing ____% of the initial mortgage pool balance; and
- ______________________ - _________ mortgage loans,
representing ____% of the initial mortgage pool balance.
[INSERT DESCRIPTION OF MORTGAGE LOAN SELLERS.]
The information set forth in this prospectus supplement concerning each
of the mortgage loan sellers has been provided by the respective mortgage loan
sellers, and neither we nor the underwriter makes any representation or warranty
as to the accuracy or completeness of this information.
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ASSIGNMENT OF THE UNDERLYING MORTGAGE LOANS
On or before the date of initial issuance of the offered certificates,
the following transfers of the underlying mortgage loans will occur. In each
case, the transferor will assign the subject mortgage loans, without recourse,
to the transferee.
--------------------------------- ------------------------------
[mortgage loan seller] [mortgage loan seller]
--------------------------------- ------------------------------
_____ mortgage loans $_______ ____ mortgage loans $_______
B
-------------------------------
Structured Asset Securities
Corporation
-------------------------------
9 All mortgage loans
$----------
-------------------------------
LB Commercial Mortgage Trust
-----------
-------------------------------
In connection with the foregoing transfers, we will be required to
deliver the following documents, among others, to the trustee with respect to
each of the pooled mortgage loans-
[SPECIFY SELECT DOCUMENTS.]
The trustee, either directly or through a custodian, is required to
hold all of the documents delivered to it with respect to the pooled mortgage
loans, in trust for the benefit of the series _____ certificateholders. Within a
specified period of time following that delivery, the trustee, directly or
through a custodian, will be further required to conduct a review of those
documents. The scope of the trustee's review of those documents will, in
general, be limited solely to
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confirming that they have been received. None of the trustee, the master
servicer, the special servicer or any custodian is under any duty or obligation
to inspect, review or examine any of the documents relating to the pooled
mortgage loans to determine whether the document is valid, effective,
enforceable, in recordable form or otherwise appropriate for the represented
purpose.
If-
- any of the above-described documents required to be delivered
by us to the trustee is not delivered or is otherwise
defective, and
- that omission or defect materially and adversely affects the
value of, or the interests of the series _____
certificateholders in, the subject loan,
then the omission or defect will constitute a material document defect as to
which the series _____ certificateholders will have the rights against us
described under "-Cures and Repurchases" below.
Within a specified period following the later of-
- the date on which the offered certificates are initially
issued, and
- the date on which all recording information necessary to
complete the subject document is received by the trustee,
the trustee must submit for recording in the real property records of the
applicable jurisdiction each of the assignments of recorded loan documents in
its favor described above. Because most of the mortgage loans that we intend to
include in the trust are newly originated, many of those assignments cannot be
completed and recorded until the related mortgage and/or assignment of leases
and rents, reflecting the necessary recording information, is returned from the
applicable recording office.
REPRESENTATIONS AND WARRANTIES
As of the date of initial issuance of the offered certificates, we will
make, with respect to each mortgage loan that we include in the trust,
representations and warranties generally to the effect listed below, together
with any other representations and warranties as may be required by the rating
agencies.
The representations and warranties to be made by us with respect to
each pooled mortgage loan will include:
[SPECIFY SELECT REPRESENTATIONS AND WARRANTIES.]
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If-
- there exists a breach of any of the above-described
representations and warranties made by us, and
- that breach materially and adversely affects the value of, or
the interests of the series _____ certificateholders in, the
subject mortgage loan,
then that breach will be a material breach as to which the series _____
certificateholders have the rights against us described under "-Cures and
Repurchases" below.
CURES AND REPURCHASES
If there exists a material breach of any of the representations and
warranties made by us with respect to any of the pooled mortgage loans, as
discussed under "-Representations and Warranties" above, or a material document
defect with respect to any pooled mortgage loan, as discussed under
"-Assignment of the Underlying Mortgage Loans" above, then we will be required
either:
- to remedy the material breach or the material document defect
in all material respects, or
- repurchase the affected mortgage loan at a price generally
equal to the sum of-
1. the unpaid principal balance of that mortgage loan at
the time of purchase, plus
2. all unpaid interest, other than Post-ARD Additional
Interest and Default Interest, due with respect to
that mortgage loan through the due date in the
collection period of purchase, plus
3. all unreimbursed advances to cover reimbursable costs
and expenses relating to the servicing and
administration of that mortgage loan.
The time period within which we must complete that remedy or repurchase
will generally be limited to 90 days following the earlier of our discovery or
receipt of notice of the subject material breach or material document defect, as
the case may be. However, if we are diligently attempting to correct the problem
we will be entitled to an additional 90 days to complete that remedy or
repurchase. Furthermore, if any material document defect arises solely out of
the failure of the applicable recording office to return a recorded mortgage
loan document, and if we are diligently attempting to retrieve that document,
then the time period may be extended for up to two years following the date of
initial issuance of the offered certificates.
Our cure/repurchase obligations described above will constitute the
sole remedy available to the series _____ certificateholders in connection with
a material breach of any of our representations or
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warranties or a material document defect, with respect to any mortgage loan in
the trust. No other person will be obligated to repurchase any affected mortgage
loan in connection with a material breach of any of the representations and
warranties or a material document defect, if we default on our obligation to do
so.
CHANGES IN MORTGAGE POOL CHARACTERISTICS
The description in this prospectus supplement of the mortgage pool is
based upon the mortgage pool as it is expected to be constituted at the time the
offered certificates are issued, with adjustments for the monthly debt service
payments due on the mortgage loans on or before the cut-off date. Prior to the
issuance of the offered certificates, one or more mortgage loans may be removed
from the mortgage pool if we consider the removal necessary or appropriate. A
limited number of other mortgage loans may be included in the mortgage pool
prior to the issuance of the offered certificates, unless including those
mortgage loans would materially alter the characteristics of the mortgage pool
as described in this prospectus supplement. We believe that the information in
this prospectus supplement will be generally representative of the
characteristics of the mortgage pool as it will be constituted at the time the
offered certificates are issued; however, the range of mortgage rates and
maturities, as well as the other characteristics of the pooled mortgage loans
described in this prospectus supplement, may vary, and the actual initial
mortgage pool balance may be as much as 5% larger or smaller than the initial
mortgage pool balance specified in this prospectus supplement.
A current report on Form 8-K will be available to purchasers of the
offered certificates on or shortly after the date of initial issuance of the
offered certificates. That current report on Form 8-K will be filed, together
with the pooling and servicing agreement, with the SEC within 15 days after the
initial issuance of the offered certificates. If mortgage loans are removed from
or added to the mortgage pool, that removal or addition will be noted in that
current report on Form 8-K.
SERVICING OF THE UNDERLYING MORTGAGE LOANS
GENERAL
The servicing of the mortgage loans in the trust will be governed by
the pooling and servicing agreement. The following summaries describe some of
the provisions of the pooling and servicing agreement relating to the servicing
and administration of the pooled mortgage loans and any real estate owned by the
trust. You should also refer to the accompanying prospectus, in particular the
section captioned "Description of the Governing Documents" for additional
important information regarding provisions of the pooling and servicing
agreement that relate to the rights and obligations of the master servicer and
the special servicer. See "Description of the Governing Documents-Collection
and Other Servicing Procedures with Respect to Mortgage Loans" in the
accompanying prospectus.
The pooling and servicing agreement provides that the master servicer
and the special servicer must each service and administer the pooled mortgage
loans and any real estate owned by the trust for which it is responsible,
directly or through sub-servicers, in accordance with-
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- any and all applicable laws, and
- the express terms of the pooling and servicing agreement and
the respective mortgage loans.
Furthermore, to the extent consistent with the foregoing, the master servicer
and the special servicer must each service and administer the pooled mortgage
loans and any real estate owned by the trust for which it is responsible in
accordance with the Servicing Standard.
In general, the master servicer will be responsible for the servicing
and administration of-
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- all mortgage loans in the trust as to which no Servicing
Transfer Event has occurred, and
- all worked-out mortgage loans in the trust as to which no new
Servicing Transfer Event has occurred.
The special servicer, on the other hand, will be responsible for the
servicing and administration of each mortgage loan in the trust as to which a
Servicing Transfer Event has occurred and which has not yet become a worked-out
mortgage loan with respect to that Servicing Transfer Event. The special
servicer will also be responsible for the administration of each mortgaged real
property that has been acquired by the trust with respect to a defaulted
mortgage loan through foreclosure, deed-in-lieu of foreclosure or otherwise.
Despite the foregoing, the pooling and servicing agreement will require
the master servicer to continue to collect information and prepare all reports
to the trustee required to be collected or prepared with respect to any
specially serviced assets and, otherwise, to render other incidental services
with respect to any specially serviced assets. Neither the master servicer nor
the special servicer will have responsibility for the performance by the other
of its respective obligations and duties under the pooling and servicing
agreement.
The master servicer will transfer servicing of a pooled mortgage loan
to the special servicer, if it has not already done so, upon the occurrence of a
Servicing Transfer Event with respect to that mortgage loan. The special
servicer will return the servicing of that mortgage loan to the master servicer,
and that mortgage loan will be considered to have been worked-out, if and when
all Servicing Transfer Events with respect to that mortgage loan.
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THE INITIAL MASTER SERVICER AND THE INITIAL SPECIAL SERVICER
THE MASTER SERVICER.
[INSERT INFORMATION RE MASTER SERVICER.]
The information set forth in this prospectus supplement concerning
___________ has been provided by it. Neither we nor the underwriter makes any
representation or warranty as to the accuracy or completeness of this
information.
THE SPECIAL SERVICER.
[INSERT INFORMATION RE SPECIAL SERVICER.]
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The information set forth in this prospectus supplement concerning
___________ has been provided by it. Neither we nor the underwriter makes any
representation or warranty as to the accuracy of this information.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
THE MASTER SERVICING FEE. The principal compensation to be paid to the
master servicer with respect to its master servicing activities will be the
master servicing fee.
The master servicing fee:
- will be earned with respect to each and every mortgage loan,
including-
1. each specially serviced mortgage loan, if any, and
2. each mortgage loan, if any, as to which the
corresponding mortgaged real property has been
acquired by the trust through foreclosure or
otherwise following a default; and
- in the case of each mortgage loan, will-
1. be calculated on a 30/360 basis,
2. accrue at the related master servicing fee rate,
3. accrue on the same principal amount as interest
accrues or is deemed to accrue from time to time with
respect to that mortgage loan, and
4. be payable monthly from amounts received with respect
to interest on that mortgage loan.
The master servicing fee rate will be ____% per annum.
ADDITIONAL MASTER SERVICING COMPENSATION. As additional master
servicing compensation, the master servicer will be entitled to receive:
- any Prepayment Interest Excesses collected with respect to the
entire mortgage pool;
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- any late payment charges and Default Interest, if any, that
were collected with respect to mortgage loans in the trust,
but only to the extent that those late payment charges and
Default Interest-
1. accrued with respect to the related mortgage loan
while no related Servicing Transfer Event existed,
and
2. have not otherwise been applied to pay the master
servicer, the special servicer or the trustee, as
applicable, interest on advances made thereby with
respect to the related mortgage loan.
In addition, all modification fees, assumption fees, assumption
application fees, consent/waiver fees and other comparable transaction fees and
charges, if any, collected with respect to the pooled mortgage loans will be
allocated between the master servicer and the special servicer, as additional
compensation, or otherwise applied to cover related expenses, as provided in the
pooling and servicing agreement.
The master servicer will be authorized to invest or direct the
investment of funds held in its custodial account, or in any and all accounts
maintained by it that are escrow and/or reserve accounts, in Permitted
Investments. See "-Custodial Account" below. The master servicer will be
entitled to retain any interest or other income earned on those funds and will
be required to cover any losses of principal from its own funds. The master
servicer will not be obligated, however, to cover any losses resulting from the
bankruptcy or insolvency of any depository institution or trust company holding
any of those accounts.
PREPAYMENT INTEREST SHORTFALLS. The pooling and servicing agreement
provides that, if any Prepayment Interest Shortfalls are incurred with respect
to the mortgage pool during any collection period, the master servicer must make
a non-reimbursable payment with respect to the related payment date in an amount
equal to the lesser of:
- the total amount of those Prepayment Interest Shortfalls, and
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- the sum of the following components of the master servicer's
total servicing compensation for that same collection period-
[TO BE SPECIFIED].
No other master servicing compensation will be available to cover Prepayment
Interest Shortfalls.
Any payments made by the master servicer with respect to any payment
date to cover Prepayment Interest Shortfalls will be included among the amounts
payable as principal and interest on the series _____ certificates on that
payment date as described under "Description of the Offered
Certificates-Payments" in this prospectus supplement. If the amount of the
payments made by the master servicer with respect to any payment date to cover
Prepayment Interest Shortfalls is less than the total of all the Prepayment
Interest Shortfalls incurred with respect to the mortgage pool during the
related collection period, then the resulting Net Aggregate Prepayment Interest
Shortfall will be allocated among the respective interest-bearing classes of the
series _____ certificates, in reduction of the interest payable on those
certificates, as and to the extent described under "Description of the Offered
Certificates-Payments-Payments of Interest" in this prospectus supplement.
PRINCIPAL SPECIAL SERVICING COMPENSATION. The principal compensation to
be paid to the special servicer with respect to its special servicing activities
will be-
- the special servicing fee,
- the workout fee, and
- the liquidation fee.
The special servicing fee:
- will be earned with respect to-
1. each specially serviced mortgage loan, if any, and
2. each mortgage loan, if any, as to which the
corresponding mortgaged real property has been
acquired by the trust through foreclosure or
otherwise following a default;
- with respect to each mortgage loan, will-
1. be calculated on a 30/360 basis,
2. accrue at a special servicing fee rate of _____% per
annum, and
3. accrue on the same principal amount as interest
accrues or is deemed to accrue from time to time on
that mortgage loan, and
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- will be payable monthly from general collections on all the
mortgage loans and any REO Properties in the trust, that are
on deposit in the master servicer's custodial account from
time to time.
THE WORKOUT FEE. The special servicer will, in general, be entitled to
receive a workout fee with respect to each worked-out mortgage loan in the
trust. The workout fee will be payable out of, and will be calculated by
application of a workout fee rate of ____% to, each collection of interest and
principal received on the mortgage loan for so long as it remains a worked-out
mortgage loan, exclusive of any portion of that collection that represents a
recovery of Default Interest or Post-ARD Additional Interest. The workout fee
with respect to any worked-out mortgage loan will cease to be payable if a new
Servicing Transfer Event occurs with respect to the loan. However, a new workout
fee would become payable if the mortgage loan again became a worked-out mortgage
loan with respect to that new Servicing Transfer Event. If the special servicer
is terminated other than for cause or resigns, it will retain the right to
receive any and all workout fees payable with respect to mortgage loans that
became worked-out mortgage loans during the period that it acted as special
servicer and remained worked-out mortgage loans at the time of its termination
or resignation. The successor special servicer will not be entitled to any
portion of those workout fees. Although workout fees are intended to provide the
special servicer with an incentive to better perform its duties, the payment of
any workout fee will reduce amounts payable to the series _____
certificateholders.
THE LIQUIDATION FEE. The special servicer will be entitled to receive a
liquidation fee with respect to each specially serviced mortgage loan in the
trust for which it obtains a full or discounted payoff from the related
borrower. The special servicer will also be entitled to receive a liquidation
fee with respect to any specially serviced mortgage loan or REO Property in the
trust as to which it receives any liquidation proceeds, condemnation proceeds or
insurance proceeds, except as described in the next paragraph. As to each
specially serviced mortgage loan and REO Property in the trust, the liquidation
fee will be payable from, and will be calculated by application of a liquidation
fee rate of ____% to, the related payment or proceeds, exclusive of any portion
of that payment or proceeds that represents a recovery of Default Interest or
Post-ARD Additional Interest.
Despite anything to the contrary described in the prior paragraph, no
liquidation fee will be payable based on, or out of, proceeds received in
connection with:
- the repurchase or replacement of any mortgage loan in the
trust by us for a breach of representation or warranty or for
defective or deficient mortgage loan documentation, as
described under "Description of the Mortgage Pool-Cures and
Repurchases" in this prospectus supplement;
- the purchase of any defaulted mortgage loan or REO Property in
the trust by the master servicer, the special servicer or any
holder or holders of certificates evidencing a majority
interest in the controlling class of the series _____
certificates, as described under "-Sale of Defaulted Mortgage
Loans" below; or
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- the purchase of all of the mortgage loans and REO Properties
in the trust by the master servicer, the special servicer or
any holder or holders of certificates evidencing a majority
interest in the controlling class of the series _____
certificates in connection with the termination of the trust,
as described under "Description of the Offered
Certificates-Termination" in this prospectus supplement.
Although liquidation fees are intended to provide the special servicer
with an incentive to better perform its duties, the payment of any liquidation
fee will reduce amounts payable to the series _____ certificateholders.
ADDITIONAL SPECIAL SERVICING COMPENSATION. As additional special
servicing compensation, the special servicer will be entitled to receive any
late payment charges and Default Interest collected with respect to mortgage
loans in the trust, but only to the extent that those late payment charges and
Default Interest-
- that accrued while the related mortgage loan was a specially
serviced mortgage loan, and
- have not otherwise been applied to pay the master servicer,
the special servicer or the trustee, as applicable, interest
on advances made the master servicer, the special servicer or
the trustee, as the case may be, with respect to the related
mortgage loan.
All modification fees, assumption fees, assumption application fees and
other comparable transaction fees and charges, if any, collected with respect to
the specially serviced mortgage loans in the trust, will be allocated between
the master servicer and the special servicer, as additional compensation, or
otherwise applied to cover related expenses, as provided in the pooling and
servicing agreement.
In addition, the special servicer will be authorized to invest or
direct the investment of funds held in its REO account in Permitted Investments.
See "-REO Account" below. The special servicer will be entitled to retain any
interest or other income earned on those funds and will be required to cover any
losses of principal from its own funds without any right to reimbursement. The
special servicer will not be obligated, however, to cover any losses resulting
from the bankruptcy or insolvency of any depository institution or trust company
holding the special servicer's REO account.
PAYMENT OF EXPENSES; SERVICING ADVANCES. Each of the master servicer
and the special servicer will be required to pay its overhead and any general
and administrative expenses incurred by it in connection with its servicing
activities under the pooling and servicing agreement. The master servicer and
the special servicer will not be entitled to reimbursement for these expenses
except as expressly provided in the pooling and servicing agreement.
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Any and all customary, reasonable and necessary out of pocket costs
and expenses incurred by the master servicer or the special servicer in
connection with the servicing of a pooled mortgage loan after a default,
delinquency or other unanticipated event, or in connection with the
administration of any REO Property, will be servicing advances. Servicing
advances will be reimbursable from future payments and other collections,
including insurance proceeds, condemnation proceeds and liquidation proceeds, in
connection with the related mortgage loan or REO Property. In addition, the
special servicer may periodically require the master servicer to reimburse the
special servicer for any servicing advances made by it. Upon reimbursing the
special servicer for any servicing advance, the master servicer will be deemed
to have made the advance.
The special servicer may request the master servicer to make servicing
advances with respect to a specially serviced mortgage loan or REO Property, in
lieu of the special servicer's making that advance itself. The special servicer
must make the request in writing, in a timely manner that does not adversely
affect the interests of any series _____ certificateholder. The master servicer
must make the requested servicing advance within a specified number of days
following the master servicer's receipt of the request. If the request is timely
and properly made, the special servicer will be relieved of any obligations with
respect to a servicing advance that it requests the master servicer to make,
regardless of whether or not the master servicer actually makes that advance.
If the master servicer or the special servicer is required under the
pooling and servicing agreement to make a servicing advance, but neither does so
within _____ days after the servicing advance is required to be made, then the
trustee will be required:
- if it has actual knowledge of the failure, to give the
defaulting party notice of its failure; and
- if the failure continues for _____ more business days, to make
the servicing advance.
Despite the foregoing discussion or anything else to the contrary in
this prospectus supplement, none of the master servicer, the special servicer or
the trustee will be obligated to make servicing advances that, in the reasonable
and good faith judgment of any party making a servicing advance, would not be
ultimately recoverable from expected collections on the related mortgage loan or
REO Property. If the master servicer, the special servicer or the trustee makes
any servicing advance that it subsequently determines, in its judgment, is not
recoverable from expected collections on the related mortgage loan or REO
Property, it may obtain reimbursement for that advance, together with interest
on that advance, out of general collections on the mortgage loans and any REO
Properties on deposit in the master servicer's custodial account from time to
time.
The master servicer will be permitted to pay, and the special servicer
may direct the payment of, some servicing expenses directly out of the master
servicer's custodial account and at times without regard to the relationship
between the expense and the funds from which it is being paid.
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The most significant of those servicing expenses relate to the remediation of
any adverse environmental circumstance or condition at any of the mortgaged real
properties. In addition, the pooling and servicing agreement will require the
master servicer, at the direction of the special servicer if a specially
serviced asset is involved, to pay directly out of the master servicer's
custodial account any servicing expense that, if advanced by the master servicer
or the special servicer, would not be recoverable from expected collections on
the related mortgage loan or REO Property. This is only to be done, however,
when the master servicer, or the special servicer if a specially serviced asset
is involved, has determined in accordance with the Servicing Standard that
making the payment is in the best interests of the certificateholders, as a
collective whole.
The master servicer, the special servicer and the trustee will be
entitled to receive interest on servicing advances made by them. The interest
will accrue on the amount of each servicing advance, and compound monthly, for
so long as the servicing advance is outstanding, at a rate per annum equal to
the prime rate as published in the "Money Rates" section of THE WALL STREET
JOURNAL, as that prime rate may change from time to time. Interest accrued
with respect to any servicing advance will be payable in the collection period
in which that advance is reimbursed-
- FIRST, out of Default Interest and late payment charges
collected on the related mortgage loan during that collection
period, and
- THEN, if and to the extent that the Default Interest and late
charges referred to in clause FIRST above are insufficient to
cover the advance interest, out of any amounts then on deposit
in the master servicer's custodial account.
SUB-SERVICERS
The master servicer and the special servicer may each delegate any of
its servicing obligations under the pooling and servicing agreement to any one
or more third-party servicers. The master servicer or the special servicer, as
the case may be, will remain obligated under the pooling and servicing agreement
for any duties delegated to a sub-servicer. Each sub-servicing agreement between
the master servicer or special servicer, as the case may be, and a sub-servicer
must provide that, if for any reason the master servicer or special servicer, as
the case may be, is no longer acting in that capacity, the trustee or any other
successor to the master servicer or special servicer, as applicable, may:
- assume the party's rights and obligations under the
sub-servicing agreement;
- enter into a new sub-servicing agreement with the sub-servicer
on terms which are acceptable to the trustee or successor
master servicer or special servicer, as the case may be, and
that sub-servicer; or
- terminate the sub-servicing agreement without cause.
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Some of the mortgage loans that we intend to include in the trust, are
currently being serviced by third-party servicers that are entitled to and will
become sub-servicers of these loans on behalf of the master servicer. Neither
the trustee nor any other successor master servicer may terminate the
sub-servicing agreement for any of those sub-servicers without cause, unless it
pays the particular sub-servicer a termination fee.
The master servicer and special servicer will each be required to
monitor the performance of sub-servicers retained by it. The master servicer and
special servicer will each be solely liable for all fees owed by it to any
sub-servicer retained by it, irrespective of whether its compensation under the
pooling and servicing agreement is sufficient to pay those fees. Each
sub-servicer will be reimbursed by the master servicer or special servicer, as
the case may be, for various expenditures which it makes, generally to the same
extent the master servicer or special servicer, as the case may be, would be
reimbursed under the pooling and servicing agreement.
THE CONTROLLING CLASS REPRESENTATIVE
CONTROLLING CLASS. As of any date of determination, the controlling
class of series _____ certificateholders will be the holders of the most
subordinate class of series _____ certificates then outstanding, other than the
class X, R-I, R-II and R-III certificates, that has a total principal balance
that is not less than ____% of that class's original total principal balance.
However, if no class of series _____ certificates, other than the class X, R-I,
R-II and R-III certificates, has a total principal balance that satisfies this
requirement, then the controlling class of series _____ certificateholders will
be the holders of the most subordinate class of series _____ certificates then
outstanding, other than the class X, R-I, R-II and R-III certificates.
ELECTION OF THE CONTROLLING CLASS REPRESENTATIVE. The controlling class
of series _____ certificateholders will be entitled to-
- select a representative having the rights and powers described
under "-The Controlling Class Representative-Rights and Powers
of the Controlling Class Representative" below, or
- replace an existing controlling class representative.
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The trustee will be required to notify promptly all the
certificateholders of the series _____ controlling class that they may select a
controlling class representative upon:
- the receipt by the trustee of written requests for the
selection of a controlling class representative from series
_____ certificateholders entitled to a majority of the voting
rights allocated to the controlling class of series _____
certificateholders;
- the resignation or removal of the person acting as controlling
class representative; or
- a determination by the trustee that the controlling class of
series _____ certificateholders has changed.
The notice will explain the process for selecting a controlling class
representative. The appointment of any person as a controlling class
representative will not be effective until:
- the trustee has received notice, in any form acceptable to the
trustee, that the appointment of that person as controlling
class representative is acceptable to series _____
certificateholders entitled to a majority of the voting rights
allocated to the controlling class of series _____
certificateholders; and
- that person provides the trustee with-
1. written confirmation of its acceptance of its
appointment,
2. an address and telecopy number for the delivery of
notices and other correspondence, and
3. a list of officers or employees of the person with
whom the parties to the pooling and servicing
agreement may deal, including their names, titles,
work addresses and telecopy numbers.
RESIGNATION AND REMOVAL OF THE CONTROLLING CLASS REPRESENTATIVE. The
controlling class representative may at any time resign by giving written notice
to the trustee and
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each certificateholder of the series _____ controlling class. The series _____
certificateholders entitled to a majority of the voting rights allocated to the
controlling class of series _____ certificateholders, will be entitled to remove
any existing controlling class representative by giving written notice to the
trustee and to the existing controlling class representative.
CERTAIN RIGHTS AND POWERS OF THE CONTROLLING CLASS REPRESENTATIVE. The
controlling class representative will be entitled to advise the special servicer
with respect to the following actions. In addition, the special servicer will
not be permitted to take any of the following actions as to which the
controlling class representative has objected in writing within _____ business
days of having been notified in writing of the particular action and having been
provided with all reasonably requested information with respect to the
particular action-
- any foreclosure upon or comparable conversion, which may
include acquisitions of an REO Property, of the ownership of
properties securing those specially serviced mortgage loans in
the trust as come into and continue in default;
- any modification, amendment or waiver of a monetary term,
including the timing of payments, or any material non-monetary
term of a pooled mortgage loan;
- any proposed sale of a defaulted mortgage loan or any related
REO Property in the trust, other than in connection with the
termination of the trust as described under "Description of
the Offered Certificates-Termination" in this prospectus
supplement, for less than par;
- any acceptance of a discounted payoff with respect to a pooled
mortgage loan;
- any determination to bring an REO Property held by the trust
into compliance with applicable environmental laws or to
otherwise address hazardous material located at the REO
Property;
- any release of collateral for a pooled mortgage loan, other
than in accordance with the terms of, or upon satisfaction of,
that mortgage loan;
- any acceptance of substitute or additional collateral for a
pooled mortgage loan, other than in accordance with the terms
of that mortgage loan;
- any waiver of a due-on-sale or due-on-encumbrance clause with
respect to a pooled mortgage loan; and
- any acceptance of an assumption agreement releasing a borrower
from liability under a pooled mortgage loan.
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In addition, the controlling class representative may direct the
special servicer to take, or to refrain from taking, any actions as the
controlling class representative may consider advisable or as to which provision
is otherwise made in the pooling and servicing agreement.
Notwithstanding the foregoing, no advice, direction or objection given
or made by the controlling class representative, as contemplated by either of
the two preceding paragraphs, may-
- require or cause the special servicer to violate applicable
law, the terms of any pooled mortgage loan or any other
provision of the pooling and servicing agreement described in
this prospectus supplement or the accompanying prospectus,
including the special servicer's obligation to act in
accordance with the Servicing Standard;
- result in an adverse tax consequence for the trust;
- expose the trust, us, the master servicer, the special
servicer, the trustee or any of our or their respective
affiliates, directors, officers, employees or agents, to any
material claim, suit or liability; or
- materially expand the scope of the master servicer's or
special servicer's responsibilities under the pooling and
servicing agreement.
The special servicer is to disregard any advice, direction or objection on the
part of the controlling class representative that would have any of the effects
described in the immediately preceding four bullet points. Furthermore, the
special servicer will not be obligated to seek approval from the controlling
class representative for any actions to be taken by the special servicer with
respect to any particular specially serviced mortgage loan if-
- the special servicer has, as described in the first paragraph
under this "--Rights and Powers of the Controlling Class
Representative" subsection, notified the controlling class
representative in writing of various actions that the special
servicer proposes to take with respect to the work-out or
liquidation of that mortgage loan, and
- for 60 days following the first of those notices, the
controlling class representative has objected to all of those
proposed actions and has failed to suggest any alternative
actions that the special servicer considers to be consistent
with the Servicing Standard.
When reviewing the rest of this "Servicing of the Underlying Mortgage
Loans" section, it is important that you consider the effects that the rights
and powers of the controlling class representative discussed above could have on
the actions of the special servicer.
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LIABILITY TO BORROWERS. In general, any and all expenses of the
controlling class representative are to be borne by the holders of the
controlling class, in proportion to their respective percentage interests in
that class, and not by the trust. However, if a claim is made against the
controlling class representative by a borrower with respect to the pooling and
servicing agreement or any particular mortgage loan, the controlling class
representative is to immediately notify the trustee, the master servicer and the
special servicer. The special servicer on behalf of the trust will, subject to
the discussion under "Description of the Governing Documents-Certain Matters
Regarding the Master Servicer, the Special Servicer, the Manager and Us" in the
accompanying prospectus, assume the defense of the claim against the controlling
class representative, but only if-
- the special servicer or the trust are also named parties to
the same action, and
- in the sole judgment of the special servicer,
1. the controlling class representative acted in good
faith, without negligence or willful misfeasance,
with regard to the particular matter at issue, and
2. there is no potential for the special servicer or the
trust to be an adverse party in the action as regards
the controlling class representative.
LIABILITY TO THE TRUST AND CERTIFICATEHOLDERS. The controlling class
representative may have special relationships and interests that conflict with
those of the holders of one or more classes of the offered certificates. In
addition, the controlling class representative does not have any duties to the
holders of any class of series _____ certificates other than the controlling
class. It may act solely in the interests of the certificateholders of the
series _____ controlling class and will have no liability to any other series
_____ certificateholders for having done so. No series _____ certificateholder
may take any action against the controlling class representative for its having
acted solely in the interests of the certificateholders of the series _____
controlling class.
REPLACEMENT OF THE SPECIAL SERVICER
Series _____ certificateholders entitled to a majority of the voting
rights allocated to the controlling class of series _____ certificateholders may
terminate an existing special servicer and
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appoint a successor. In addition, if the special servicer is terminated in
connection with an event of default, series _____ certificateholders entitled to
a majority of the voting rights allocated to the controlling class of series
_____ certificateholders, may appoint a successor. See "-Events of Default" and
"-Rights Upon Event of Default" below. In either case, any appointment of a
successor special servicer will be subject to, among other things, receipt by
the trustee of-
1. written confirmation from each of __________ and
__________ that the appointment will not result in a
qualification, downgrade or withdrawal of any of the
ratings then assigned thereby to the series _____
certificates, and
2. the written agreement of the proposed special
servicer to be bound by the terms and conditions of
the pooling and servicing agreement, together with an
opinion of counsel regarding, among other things, the
enforceability of the pooling and servicing agreement
against the proposed special servicer.
Subject to the foregoing, any certificateholder or any affiliate of a
certificateholder may be appointed as special servicer.
If the controlling class of series _____ certificateholders terminate
an existing special servicer without cause, then the reasonable out-of-pocket
costs and expenses of any related transfer of servicing duties are to be paid by
the successor special servicer or the certificateholders that voted to remove
the terminated special servicer, as the parties may agree. The terminated
special servicer will be entitled to:
- payment out of the master servicer's custodial account for all
accrued and unpaid special servicing fees; and
- reimbursement by the successor special servicer for any
outstanding servicing advances made by the terminated special
servicer, together with interest.
Upon reimbursement, any advance will be treated as if it were made by the
successor special servicer.
BENEFICIAL OWNERS OF THE CONTROLLING CLASS
If the controlling class of series _____ certificates is held in
book-entry form, then any beneficial owner of those certificates whose identity
and beneficial ownership interest has been proven to the satisfaction of the
trustee, will be entitled-
- to receive all notices described under "-The Controlling Class
Representative" and "Replacement of the Special Servicer"
above, and
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- to exercise directly all rights described under "--The Controlling
Class Representative" and "Replacement of the Special Servicer" above,
that it otherwise would if it were the registered holder of certificates of the
series _____ controlling class.
ENFORCEMENT OF DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Subject to the discussion under "--The Controlling Class
Representative" above, the master servicer or the special servicer, as
applicable, will be required to determine, in a manner consistent with the
Servicing Standard, whether to exercise any right the lender under any pooled
mortgage loan may have under either a due-on-sale or due-on-encumbrance clause
to accelerate payment of that mortgage loan. However, under the circumstances
described below in this paragraph, neither the master servicer nor the special
servicer may waive its rights or grant its consent under any due-on-sale or
due-on-encumbrance clause unless it has received written confirmation from each
applicable rating agency that this action would not result in the qualification,
downgrade or withdrawal of any of the then-current ratings then assigned by the
rating agency to the series _____ certificates. With respect to due-on-sale
clauses, this requirement will apply only if the outstanding principal balance
of the subject mortgage loan, together with the total outstanding principal
balance of all other pooled mortgage loans that are cross-collateralized with
the subject mortgage loan or have been made to the same borrower or affiliated
borrowers, is equal to or greater than a specified percentage of the then total
principal balance of the mortgage pool. In the case of due-on-encumbrance
provisions, this requirement will always apply. In addition, the master servicer
may not waive its rights or grant its consent under any due-on-sale or
due-on-encumbrance clause without the consent of the special servicer.
MODIFICATIONS, WAIVERS, AMENDMENTS AND CONSENTS
Subject to the discussion under "--The Controlling Class
Representative" above, the special servicer, with respect to the specially
serviced mortgage loans in the trust, and the master servicer, with respect to
the other pooled mortgage loans, each may, consistent with the Servicing
Standard, agree to:
- modify, waive or amend any term of any mortgage loan;
- extend the maturity of any mortgage loan;
- defer or forgive the payment of interest on and principal of
any mortgage loan;
- defer or forgive the payment of prepayment premiums, yield
maintenance charges and late payment charges on any mortgage
loan;
- permit the release, addition or substitution of collateral
securing any mortgage loan; or
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- permit the release, addition or substitution of the borrower
or any guarantor of any mortgage loan.
The ability of the special servicer or the master servicer to agree to any of
the foregoing, however, is subject to each of the following limitations,
conditions and restrictions:
- With limited exception, including with respect to some routine
matters, the master servicer may not agree to modify, waive or
amend any term of, or take any of the other above-referenced
actions with respect to, any of the pooled mortgage loans
without the consent of the special servicer.
- With limited exception, including with respect to Post-ARD
Additional Interest, the special servicer may not agree to or
consent to the master servicer's agreeing to modify, waive or
amend any term of, or take or consent to the master servicer's
taking any of the other above-referenced actions with respect
to, any mortgage loan in the trust, if doing so would--
1. affect the amount or timing of any related payment of
principal, interest or other amount payable under the
mortgage loan, or
2. in the special servicer's judgment, materially impair
the security for the mortgage loan or reduce the
likelihood of timely payment of amounts due on the
mortgage loan,
unless a material default on the mortgage loan has occurred
or, in the special servicer's judgment, a default with respect
to payment on the mortgage loan is reasonably foreseeable, and
the modification, waiver, amendment or other action is
reasonably likely to produce a greater recovery to the
certificateholders, as a collective whole, on a present value
basis, than would liquidation.
- The special servicer may not extend or consent to the master
servicer's extending the date on which any balloon payment is
scheduled to be due on any mortgage loan in the trust to a
date beyond the earliest of--
1. the ________ anniversary of the mortgage loan's
original stated maturity date,
2. ________ years prior to the rated final payment date,
and
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3. if the mortgage loan is secured by a mortgage solely
or primarily on the related borrower's leasehold
interest in the corresponding mortgaged real
property, ten years prior to the end of the then
current term of the related ground lease, plus any
unilateral options to extend.
- Neither the master servicer nor the special servicer may make
or permit any modification, waiver or amendment of any term
of, or take any of the other above-referenced actions with
respect to, any mortgage loan in the trust that would--
1. cause any of REMIC I, REMIC II or REMIC III to fail
to qualify as a REMIC under the Internal Revenue Code
of 1986,
2. result in the imposition of any tax on prohibited
transactions or contributions after the startup date
of any of REMIC I, REMIC II or REMIC III under the
Internal Revenue Code of 1986, or
3. adversely affect the status of any portion of the
trust that is intended to be a grantor trust under
the Internal Revenue Code of 1986;
- The special servicer may not permit or consent to the master
servicer's permitting any borrower to add or substitute any
real estate collateral for any mortgage loan in the trust,
unless the special servicer has first--
1. determined, based upon an environmental assessment
prepared by an independent person who regularly
conducts environmental assessments, at the expense of
the borrower, that:
- the additional or substitute collateral is
in compliance with applicable environmental
laws and regulations, and
- that there are no circumstances or
conditions present with respect to the new
collateral relating to the use, management
or disposal of any hazardous materials for
which investigation, testing, monitoring,
containment, clean-up or remediation would
be required under any then applicable
environmental laws or regulations, and
2. received confirmation from each of __________ and
__________ that the addition or substitution of
collateral will not result in a qualification,
downgrade or withdrawal of any rating then assigned
by the rating agency to a class of series _____
certificates.
- Subject to limited exceptions, the special servicer may not
release or consent to the master servicer's releasing any
material collateral securing an outstanding mortgage loan in
the trust other than in accordance with the terms of, or upon
satisfaction of, the mortgage loan.
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The foregoing limitations, conditions and restrictions will not apply
to any of the acts referenced in this "--Modifications, Waivers, Amendments and
Consents" section that is required under the terms of the subject mortgage loan
in effect on the date of initial issuance of the offered certificates or that is
solely within the control of the related borrower. Also, neither the master
servicer nor the special servicer will be required to oppose the confirmation of
a plan in any bankruptcy or similar proceeding involving a borrower if, in its
judgment, opposition would not ultimately prevent the confirmation of the plan
or one substantially similar, despite the discussion above.
Notwithstanding the foregoing, the master servicer will be permitted,
in the case of an ARD Loan, in its discretion, after the related anticipated
repayment date, to waive any or all of the Post-ARD Additional Interest accrued
on that mortgage loan, if the related borrower is ready and willing to pay all
other amounts due under the mortgage loan in full, including the entire
principal balance. However, the master servicer's determination to waive the
trust's right to receive that Post-ARD Additional Interest--
- must be in accordance with the Servicing Standard, and
- will be subject to approval by the special servicer.
The master servicer will not have any liability to the trust, the series _____
certificateholders or any other person for any determination that is made in
accordance with the Servicing Standard. The pooling and servicing agreement will
also limit the master servicer's and the special servicer's ability to institute
an enforcement action solely for the collection of Post-ARD Additional Interest.
All modifications, waivers and amendments entered into with respect to
the pooled mortgage loans are to be in writing. Each of the master servicer and
the special servicer must deliver to the trustee for deposit in the related
mortgage file, an original counterpart of the agreement relating to each
modification, waiver or amendment agreed to by it, promptly following its
execution.
REQUIRED APPRAISALS
Promptly following the occurrence of any Appraisal Trigger Event with
respect to any of the pooled mortgage loans, the special servicer must obtain,
and deliver to the trustee and master servicer a copy of, an appraisal of the
related mortgaged real property from an independent appraiser meeting the
qualifications imposed in the pooling and servicing agreement, unless an
appraisal had previously been obtained within the prior _____ months.
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Notwithstanding the foregoing, if the unpaid principal balance of the
subject mortgage loan, net of related unreimbursed advances of principal, is
less than $___________, the special servicer may perform an internal valuation
of the mortgaged real property.
As a result of any appraisal or other valuation, it may be determined
that an Appraisal Reduction Amount exists with respect to the subject mortgage
loan.
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An Appraisal Reduction Amount is relevant to the determination of the
amount of any advances of delinquent interest required to be made with respect
to the affected mortgage loan. See "Description of the Offered
Certificates--Advances of Delinquent Monthly Debt Service Payments" in this
prospectus supplement.
If an Appraisal Trigger Event occurs with respect to any mortgage loan
in the trust, then the special servicer will have an ongoing obligation to
obtain or perform, as the case may be, within _____ days of each anniversary of
the occurrence of that Appraisal Trigger Event, an update of the prior required
appraisal or other valuation. Based upon that update, the special servicer is to
redetermine and report to the trustee and the master servicer the new Appraisal
Reduction Amount, if any, with respect to the mortgage loan. This ongoing
obligation will cease if and when--
- the subject mortgage loan has become a worked-out mortgage
loan as contemplated under "--General" above,
- the subject mortgage loan has remained current for at least
_____ consecutive monthly debt service payments, and
- no other Servicing Transfer Event has occurred with respect to
the subject mortgage loan during the preceding _____ months.
The cost of each required appraisal, and any update of that appraisal,
will be advanced by the master servicer and will be reimbursable to the master
servicer as a servicing advance.
At any time that an Appraisal Reduction Amount exists with respect to
any mortgage loan in the trust, the controlling class representative will be
entitled, at its own expense, to obtain and deliver to the master servicer, the
special servicer and the trustee an appraisal that satisfies the criteria for a
required appraisal. Upon request of the controlling class representative, the
special servicer will be required to recalculate the Appraisal Reduction Amount
with respect to the subject mortgage loan based on that appraisal.
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CUSTODIAL ACCOUNT
GENERAL. The master servicer will be required to establish and maintain
a custodial account for purposes of holding payments and other collections that
it receives with respect to the pooled mortgage loans. That custodial account
must be maintained in a manner and with a depository institution that satisfies
rating agency standards for securitizations similar to the one involving the
offered certificates.
The funds held in the master servicer's custodial account may be held
as cash or invested in Permitted Investments. Any interest or other income
earned on funds in the master servicer's custodial account will be paid to the
master servicer as additional compensation subject to the limitations set forth
in the pooling and servicing agreement.
DEPOSITS. Under the pooling and servicing agreement, the master
servicer must deposit or cause to be deposited in its custodial account within
one business day following receipt, in the case of payments and other
collections on the pooled mortgage loans, or as otherwise required under the
pooling and servicing agreement, the following payments and collections received
or made by or on behalf of the master servicer with respect to the mortgage pool
subsequent to the date of initial issuance of the offered certificates, other
than monthly debt service payments due on or before the cut-off date, which
monthly debt service payments belong to the related mortgage loan seller:
- all payments on account of principal on the mortgage loans,
including principal prepayments;
- all payments on account of interest on the mortgage loans,
including Default Interest and Post-ARD Additional Interest;
- all prepayment premiums, yield maintenance charges and late
payment charges collected with respect to the mortgage loans;
- all proceeds received under any hazard, flood, title or other
insurance policy that provides coverage with respect to a
mortgaged real property or the
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related mortgage loan, and all proceeds received in connection
with the condemnation or the taking by right of eminent domain
of a mortgaged real property, in each case to the extent not
otherwise required to be applied to the restoration of the
real property or released to the related borrower;
- all amounts received and retained in connection with the
liquidation of defaulted mortgage loans by foreclosure or as
otherwise contemplated under "--Realization Upon Defaulted
Mortgage Loans" below;
- any amounts paid by us in connection with the repurchase or
replacement of a mortgage loan as described under "Description
of the Mortgage Pool--Cures and Repurchases" in this
prospectus supplement;
- any amounts paid to purchase all the mortgage loans and any
REO Properties in connection with the termination of the trust
as contemplated under "Description of the Offered
Certificates--Termination" in this prospectus supplement;
- any amounts required to be deposited by the master servicer in
connection with losses incurred with respect to Permitted
Investments of funds held in the custodial account;
- all payments required to be paid by the master servicer or the
special servicer with respect to any deductible clause in any
blanket insurance policy as described under "Description of
the Mortgage Pool--Underwriting Matters--Hazard, Liability
and Other Insurance" in this prospectus supplement;
- any amount required to be transferred from the special
servicer's REO account; and
- any amounts required to be transferred from any debt service
reserve accounts with respect to the mortgage loans.
Upon receipt of any of the amounts described in the first five bullet
points of the prior paragraph with respect to any specially serviced mortgage
loan in the trust, the special servicer is required to promptly remit these
amounts to the master servicer for deposit in the master servicer's custodial
account.
WITHDRAWALS. The master servicer may make withdrawals from its
custodial account for any of the following purposes, which are NOT listed in any
order of priority:
1. to remit to the trustee for deposit in the trustee's
collection account described under "Description of the Offered
Certificates--Collection Account" in this prospectus
supplement, on the business day preceding each payment date,
all payments and other collections on the mortgage loans and
any REO Properties in the trust that are then on deposit in
the custodial account,
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exclusive of any portion of those payments and other
collections that represents one or more of the following--
- monthly debt service payments due on a due date
subsequent to the end of the related collection
period,
- payments and other collections received after the end
of the related collection period, and
- amounts that are payable or reimbursable from the
custodial account to any person other than the series
_____ certificateholders in accordance with any of
clauses 2. through 17. below;
2. to reimburse itself, the special servicer or the trustee, as
applicable, for any unreimbursed advances made by that party
under the pooling and servicing agreement, and the
reimbursement is to be made out of collections on the mortgage
loan or REO Property as to which the advance was made;
3. to pay itself earned and unpaid master servicing fees with
respect to each mortgage loan in the trust, and the payment of
those fees is to be made out of collections on that mortgage
loan that are allocable as interest;
4. to pay the special servicer, out of general collections on the
mortgage loans and any REO Properties in the trust, earned and
unpaid special servicing fees with respect to each mortgage
loan in the trust that is either--
- a specially serviced mortgage loan, or
- a mortgage loan as to which the related mortgaged
real property has become an REO Property;
5. to pay the special servicer earned and unpaid workout fees and
liquidation fees to which it is entitled, and the payment of
those fees is to be made from the sources described under
"--Servicing and Other Compensation and Payment of Expenses"
above;
6. to reimburse itself, the special servicer or the trustee, as
applicable, out of general collections on the mortgage loans
and any REO Properties in the trust, for any unreimbursed
advance made by that party under the pooling and servicing
agreement that has been determined not to be ultimately
recoverable under clause 2. above;
7. to pay itself, the special servicer or the trustee, as
applicable, unpaid interest on any advance made by that party
under the pooling and servicing agreement,
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and the payment of that unpaid interest is to be made out of
Default Interest and late payment charges received--
- with respect to the mortgage loan as to which the
advance was made, and
- during the collection period in which that advance is
reimbursed;
8. in connection with the reimbursement of advances as described
in clause 2. or 6. above, to pay itself, the special servicer
or the trustee, as the case may be, out of general collections
on the mortgage loans and any REO Properties in the trust, any
interest accrued and payable on that advance and not otherwise
payable under clause 7. above;
9. to pay itself any items of additional master servicing
compensation on deposit in the custodial account as discussed
under "--Servicing and Other Compensation and Payment of
Expenses--Additional Master Servicing Compensation" above;
10. to pay the special servicer any items of additional special
servicing compensation on deposit in the custodial account as
discussed under "--Servicing and Other Compensation and
Payment of Expenses--Additional Special Servicing
Compensation" above;
11. to pay any unpaid liquidation expenses incurred with respect
to any liquidated mortgage loan or REO Property in the trust,
and payment of those expenses is to be made out of collections
on that mortgage loan or REO Property, as the case may be;
12. to pay, out of general collections on the mortgage loans and
any REO Properties in the trust, any servicing expenses that
would, if advanced, be nonrecoverable under clause 2. above;
13. to pay, out of general collections on the mortgage loans and
any REO Properties in the trust, for costs and expenses
incurred by the trust in connection with the remediation of
adverse environmental conditions at any mortgaged real
property that secures a defaulted mortgage loan in the trust;
14. to pay itself, the special servicer, the trustee, us or any of
their or our respective directors, officers, employees and
agents, as the case may be, out of general collections on the
mortgage loans and any REO Properties in the trust, any of the
reimbursements or indemnities to which we or any of those
other persons or entities are entitled as described under
"Description of the Governing Documents--Matters Regarding
the Master Servicer, the Special Servicer, the Manager and Us"
and "--Matters Regarding the Trustee" in the accompanying
prospectus;
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15. to pay, out of general collections on the mortgage loans and
any REO Properties in the trust, for the costs of certain
opinions of counsel, the cost of recording the pooling and
servicing agreement and expenses properly incurred by the tax
administrator in connection with providing advice to the
special servicer;
16. to pay any other items described in this prospectus supplement
as being payable from the custodial account;
17. to withdraw amounts deposited in the custodial account in
error, including amounts received on any mortgage loan or REO
Property that has been purchased or otherwise removed from the
trust; and
18. to clear and terminate the custodial account upon the
termination of the pooling and servicing agreement.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The pooling and servicing agreement grants to the master servicer, the
special servicer and any single certificateholder or group of certificateholders
of the controlling class, a right to purchase from the trust certain defaulted
mortgage loans in the priority described in the next paragraph.
If the special servicer has determined, in its judgment, that the sale
of any defaulted mortgage loan by the trust under the circumstances described
below in this paragraph, is in accordance with the Servicing Standard, the
special servicer must give prompt written notice of its determination to the
trustee and the master servicer. The trustee will then be required, within five
days after receipt of that notice, to provide a similar notice to all
certificateholders of the series _____ controlling class. Any single
certificateholder or group of certificateholders of the series _____ controlling
class may, at its or their option, within ten days after receiving the notice
from the trustee, purchase that defaulted mortgage loan from the trust, at a
cash price generally equal to--
- the outstanding principal balance of the mortgage loan,
- all accrued and unpaid interest on the mortgage loan, and
- all unreimbursed servicing advances with respect to, the
subject mortgage loan.
If two or more separate certificateholders or groups of certificateholders of
the series _____ controlling class want to purchase the defaulted mortgage loan,
preference will be given to the certificateholder or group of certificateholders
with the largest interest in the series _____ controlling class. If
certificateholders of the series _____ controlling class have not purchased that
defaulted mortgage loan within _____ days of their having received the relevant
notice, then for a limited period, either the special servicer or the master
servicer, in that order of priority, may at its option purchase the defaulted
mortgage loan from the trust at the same cash price as was applicable for the
certificateholders of the series _____ controlling class. Each of the master
servicer and the special servicer may designate an affiliate to complete the
purchase.
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The special servicer may offer to sell, on behalf of the trust, any
defaulted mortgage loan not otherwise purchased as described in the preceding
paragraph, if and when the special servicer determines, consistent with the
Servicing Standard, that a sale would be in the best economic interests of the
series _____ certificateholders, as a collective whole. Any offer must be made
in a commercially reasonable manner for a period of not less than ten days.
Subject to the discussion in the next paragraph and under "--The Controlling
Class Representative" above, the special servicer will be required to accept the
highest cash bid received from any person that is a fair price, determined in
accordance with the pooling and servicing agreement, for the mortgage loan.
The special servicer will not be obligated to accept the highest cash
bid if the special servicer determines, in accordance with the Servicing
Standard, that rejection of the highest cash bid would be in the best interests
of the series _____ certificateholders, as a collective whole. Furthermore,
subject to the discussion under "--The Controlling Class Representative" above,
the special servicer may accept a lower cash bid from any person or entity other
than itself or an affiliate if it determines, in accordance with the Servicing
Standard, that acceptance of the bid would be in the best interests of the
series _____ certificateholders, as a collective whole. For example, the
prospective buyer making the lower bid may be more likely to perform its
obligations or the terms, other than the price, offered by the prospective buyer
making the lower bid may be more favorable.
Neither the trustee, in its individual capacity, nor any of its
affiliates may bid for or purchase from the trust any defaulted mortgage loan or
any REO Property.
In connection with the sale of any defaulted mortgage loan on behalf of
the trust, the special servicer may charge prospective bidders, and retain, fees
that approximate the special servicer's actual costs in the preparation and
delivery of information pertaining to the sales or evaluating bids without
obligation to deposit the amounts into its collection account.
If a default on a pooled mortgage loan has occurred or, in the special
servicer's judgment, a payment default is imminent, then, subject to the
discussion under "--The Controlling Class Representative" above, the special
servicer may, on behalf of the trust, take any of the following actions:
- institute foreclosure proceedings;
- exercise any power of sale contained in the related mortgage;
- obtain a deed in lieu of foreclosure; or
- otherwise acquire title to the corresponding mortgaged real
property, by operation of law or otherwise.
The special servicer may not, however, acquire title to any mortgaged
real property, have a receiver of rents appointed with respect to any mortgaged
real property or take any other action with respect to any mortgaged real
property that would cause the trustee, for the benefit of the
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 the particular real property within the meaning of the federal environmental
laws, unless--
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- the special servicer has previously received a report prepared
by a person who regularly conducts environmental audits, which
report will be an expense of the trust, and
- either:
1. the report indicates that--
- the particular real property is in
compliance with applicable environmental
laws and regulations, and
- there are no circumstances or conditions
present at the real property that have
resulted in any contamination for which
investigation, testing, monitoring,
containment, clean-up or remediation could
be required under any applicable
environmental laws and regulations; or
2. the special servicer, based solely as to
environmental matters and related costs on the
information set forth in the report, determines that
taking the actions necessary to bring the particular
real property into compliance with applicable
environmental laws and regulations and/or taking any
of the other actions contemplated by clause 1. above,
is reasonably likely to produce a greater recovery,
taking into account the time value of money, than not
taking those actions.
If the trust acquires title to any mortgaged real property, the special
servicer, on behalf of the trust, has to sell the particular real property prior
to the close of the third taxable year following the taxable year in which that
acquisition occurred, subject to limited exceptions as described under "--REO
Properties" below.
If liquidation proceeds collected with respect to a defaulted mortgage
loan in the trust are less than the outstanding principal balance of the
defaulted mortgage loan, together with accrued interest on and reimbursable
expenses incurred by the special servicer and/or the master servicer in
connection with the defaulted mortgage loan, then the trust will realize a loss
in the amount of the shortfall. The special servicer and/or the master servicer
will be entitled to reimbursement out of the liquidation proceeds recovered on
any defaulted mortgage loan, prior to the payment of the liquidation proceeds to
the series _____ certificateholders, for--
- any and all amounts that represent unpaid servicing
compensation with respect to 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.
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In addition, amounts otherwise payable on the series _____ certificates may be
further reduced by interest payable to the master servicer and/or special
servicer on the servicing expenses and advances.
REO PROPERTIES
If title to any mortgaged real property is acquired by the special
servicer on behalf of the trust, the special servicer will be required to sell
that property not later than the end of the third calendar year following the
year of acquisition, unless--
- the IRS grants an extension of time to sell the property, or
- the special servicer obtains an opinion of independent counsel
generally to the effect that the holding of the property
subsequent to the end of the third calendar year following the
year in which the acquisition occurred will not result in the
imposition of a tax on the trust assets or cause any of REMIC
I, REMIC II or REMIC III to fail to qualify as a REMIC under
the Internal Revenue Code of 1986.
Subject to the foregoing, the special servicer will generally be
required to solicit cash offers for any REO Property held by the trust in a
manner that will be reasonably likely to realize a fair price for the property.
The special servicer may retain an independent contractor to operate and manage
the REO Property. The retention of an independent contractor will not relieve
the special servicer of its obligations with respect to the REO Property.
Regardless of whether the special servicer applies for or is granted an
extension of time to sell the property, the special servicer must act in
accordance with the Servicing Standard to liquidate the property on a timely
basis. If an extension is granted or opinion given, the special servicer must
sell the REO Property within the period specified in the extension or opinion.
In general, the special servicer or an independent contractor employed
by the special servicer at the expense of the trust will be obligated to operate
and manage any REO Property held by the trust in a manner that:
1. maintains its status as foreclosure property under the REMIC
provisions of the Internal Revenue Code of 1986, and
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2. is in accordance with the Servicing Standard.
The special servicer must review the operation of each REO Property
held by the trust and consult with the trustee, or any person appointed by the
trustee to act as tax administrator, to determine the trust's federal income tax
reporting position with respect to the income it is anticipated that the trust
would derive from the property. The special servicer could determine that it
would not be consistent with the Servicing Standard to manage and operate the
property in a manner that would avoid the imposition of--
- a tax on net income from foreclosure property, within the
meaning of Section 857(b)(4)(B) of the Internal Revenue Code
of 1986, or
- a tax on prohibited transactions under Section 860F of the
Internal Revenue Code of 1986.
This determination is most likely to occur in the case of an REO Property that
is a hotel or residential health care facility. To the extent that income the
trust receives from an REO Property is subject to--
- a tax on net income from foreclosure property, that income
would be subject to federal tax at the highest marginal
corporate tax rate, which is currently 35%, or
- a tax on prohibited transactions, that income would be subject
to federal tax at a 100% rate.
The determination as to whether income from an REO Property held by the
trust would be subject to a tax will depend on the specific facts and
circumstances relating to the management and operation of each REO Property.
Generally, income from an REO Property that is directly operated by the special
servicer would be apportioned and classified as service or non-service
income. The service portion of the income could be subject to federal tax
either at the highest marginal corporate tax rate or at the 100% rate. The
non-service portion of the income could be subject to federal tax at the
highest marginal corporate tax rate or, although it appears unlikely, at the
100% rate. Any tax imposed on the trust's income from an REO Property would
reduce the amount available for payment to the series _____ certificateholders.
See "Federal Income Tax Consequences" in this prospectus supplement and in the
accompanying prospectus. The reasonable out-of-pocket costs and expenses of
obtaining professional tax advice in connection with the foregoing will be
payable out of the master servicer's custodial account.
The special servicer will be required to segregate and hold all funds
collected and received in connection with any REO Property held by the trust
separate and apart from its own funds and general assets. If an REO Property is
acquired by the trust, the special servicer will be required to establish and
maintain an account for the retention of revenues and other proceeds derived
from the REO Property. That REO account must be maintained in a manner and with
a depository institution that satisfies rating agency standards for
securitizations similar to the
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one involving the offered certificates. The special servicer will be required to
deposit, or cause to be deposited, in its REO account, upon receipt, all net
income, insurance proceeds, condemnation proceeds and liquidation proceeds
received with respect to each REO Property held by the trust. The funds held in
this REO account may be held as cash or invested in Permitted Investments. Any
interest or other income earned on funds in the special servicer's REO account
will be payable to the special servicer, subject to the limitations described in
the pooling and servicing agreement.
The special servicer will be required to withdraw from its REO account
funds necessary for the proper operation, management, leasing, maintenance and
disposition of any REO Property held by the trust, but only to the extent of
amounts on deposit in the account relating to that particular REO Property.
Promptly following the end of each collection period, the special servicer will
be required to withdraw from the REO account and deposit, or deliver to the
master servicer for deposit, into the master servicer's custodial account the
total of all amounts received with respect to each REO Property held by the
trust during that collection period, net of--
- any withdrawals made out of those amounts as described in the
preceding sentence, and
- any portion of those amounts that may be retained as reserves
as described in the next sentence.
The special servicer may, subject to the limitations described in the pooling
and servicing agreement, retain in its REO account the portion of the proceeds
and collections as may be necessary to maintain a reserve of sufficient funds
for the proper operation, management, leasing, maintenance and disposition of
the related REO Property, including the creation of a reasonable reserve for
repairs, replacements, necessary capital improvements and other related
expenses.
The special servicer shall keep and maintain separate records, on a
property-by-property basis, for the purpose of accounting for all deposits to,
and withdrawals from, its REO account.
INSPECTIONS; COLLECTION OF OPERATING INFORMATION
The special servicer will be required, at the expense of the trust, to
inspect or cause an inspection of the corresponding mortgaged real property as
soon as practicable after any pooled mortgage loan becomes a specially serviced
mortgage loan. The master servicer also will be required, at its own expense, to
inspect or cause an inspection of each mortgaged real property at least once
every _______________, if the special servicer has not already undertaken an
inspection in that period as described in the preceding sentence. The master
servicer and the special servicer will each be required to prepare or cause the
preparation of a written report of each inspection performed by it that
generally describes the condition of the particular real property and that
specifies--
- any sale, transfer or abandonment of the property of which the
master servicer or the special servicer, as applicable, is
aware, or
S-106
<PAGE>
- any change in the property's condition, occupancy or value
that the master servicer or the special servicer, as
applicable, in accordance with the Servicing Standard,
considers to be material.
The special servicer, in the case of each specially serviced mortgage
loan in the trust, and the master servicer, in the case of each other mortgage
loan in the trust, will each be required to use reasonable efforts to collect
from the related borrower and review the following items, to the extent that
those items are required to be delivered under the related loan documents:
- the quarterly and annual operating statements, budgets and
rent rolls of the corresponding mortgaged real property; and
- the quarterly and annual financial statements of the borrower.
The special servicer will also be required to cause quarterly and
annual operating statements, budgets and rent rolls to be prepared for each REO
Property in the trust. However, there can be no assurance that any operating
statements required to be delivered by a borrower will in fact be delivered, nor
is the master servicer or the special servicer likely to have any practical
means of compelling delivery.
EVIDENCE AS TO COMPLIANCE
On or before _____________ of each year, beginning _______________,
each of the master servicer and the special servicer must--
- at its expense, cause a firm of independent public
accountants, that is a member of the American Institute of
Certified Public Accountants to furnish a statement to the
trustee, among others, to the effect that--
1. the firm has examined the servicing operations of the
master servicer or the special servicer, as the case
may be, for the previous year, and
2. on the basis of that examination, conducted
substantially in compliance with USAP, the firm
confirms that the master servicer or the special
servicer, as applicable, has complied with the
minimum servicing standards identified in USAP, in
all material respects, except for the significant
exceptions or errors in records that, in the opinion
of the firm, USAP requires it to report.
In rendering its report the firm may rely, as to matters
relating to the direct servicing of commercial and multifamily
mortgage loans by sub-servicers, upon comparable reports of
firms of independent certified public accountants rendered on
the basis of examinations conducted in accordance with the
same standards, within one year of the report, with respect to
those sub-servicers.
S-107
<PAGE>
- deliver to the trustee, among others, a statement signed by an
officer of the master servicer or the special servicer, as the
case may be, to the effect that, to the best knowledge of that
officer, the master servicer or special servicer, as the case
may be, has fulfilled its obligations under the pooling and
servicing agreement in all material respects throughout the
preceding calendar year or portion of that year during which
the series _____ certificates were outstanding.
EVENTS OF DEFAULT
Each of the following events, circumstances and conditions will be
considered events of default under the pooling and servicing agreement:
- the master servicer or the special servicer fails to deposit,
or to remit to the appropriate party for deposit, into the
master servicer's custodial account or the special servicer's
REO account, as applicable, any amount required to be so
deposited, and that failure continues unremedied for _____
business days following the date on which the deposit or
remittance was required to be made;
- the master servicer fails to remit to the trustee for deposit
in the trustee's collection account any amount required to be
so remitted, and that failure continues unremedied for _____
business days following the date on which the remittance was
required to be made;
- the master servicer or the special servicer fails to timely
make any servicing advance required to be made by it under the
pooling and servicing agreement, and that failure continues
unremedied for _____ business days following the date on which
notice has been given to the master servicer or the special
servicer, as the case may be, by the trustee;
- the master servicer or the special servicer fails to observe
or perform in any material respect any of its other covenants
or agreements under the pooling and servicing agreement, and
that failure continues unremedied for _____ days after written
notice of it has been given to the master servicer or the
special servicer, as the case may be, by any other party to
the pooling and servicing agreement or by series _____
certificateholders entitled to not less than ____% of the
voting rights for the series;
- it is determined that there is a breach by the master servicer
or the special servicer of any of its representations or
warranties contained in the pooling and servicing agreement
that materially and adversely affects the interests of any
class of series _____ certificateholders, and that breach
continues unremedied for _____ days after written notice of it
has been given to the master servicer or the special servicer,
as the case may be, by any other party to the pooling and
servicing agreement or by the series _____ certificateholders
entitled to not less than ____% of the voting rights for the
series;
S-108
<PAGE>
- a decree or order of a court having jurisdiction in an
involuntary case for the appointment of a receiver,
liquidator, trustee or similar official in any bankruptcy,
insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings is entered against the
master servicer or the special servicer and the decree or
order remains in force for a period of _____ days;
- the master servicer or special servicer consents to the
appointment of a receiver, liquidator, trustee or similar
official relating to it or of or relating to all or
substantially all of its property;
- the master servicer or special servicer admits in writing its
inability to pay its debts or takes other actions indicating
its insolvency or inability to pay its obligations;
- one or more ratings assigned by either ____________ or
____________ to the series _____ certificates are qualified,
downgraded or withdrawn as a result of the master servicer or
special servicer acting in that capacity; and
- the trustee receives written notice from either ____________
or ____________ that the continuation of the master servicer
or the special servicer, as the case may be, in that capacity
would result in a qualification, downgrade or withdrawal of
any rating then assigned by that rating agency to any class of
the series _____ certificates.
When a single entity acts as master servicer and special servicer, an
event of default in one capacity will be an event of default in the other
capacity.
RIGHTS UPON EVENT OF DEFAULT
If an event of default described above under "--Events of Default"
occurs with respect to the master servicer or the special servicer and remains
unremedied, the trustee will be authorized, and at the direction of the series
_____ certificateholders entitled to not less than ____% of the voting rights
for the series, the trustee will be required, to terminate all of the rights and
obligations of the defaulting party under the pooling and servicing agreement
and in and to the trust assets other than any rights the defaulting party may
have as a series _____ certificateholder. Upon any termination, the trustee must
either:
- succeed to all of the responsibilities, duties and liabilities
of the master servicer or special servicer, as the case may
be, under the pooling and servicing agreement; or
- appoint an established mortgage loan servicing institution to
act as successor master servicer or special servicer, as the
case may be.
The holders of series _____ certificates entitled to a majority of the voting
rights for the series may require the trustee to appoint an established mortgage
loan servicing institution to act as successor master servicer or special
servicer, as the case may be, rather than have the trustee act as that
successor.
S-109
<PAGE>
The appointment of a successor special servicer by the trustee is subject to the
rights of the controlling class of series _____ certificateholders to designate
a successor special servicer as described under "--Replacement of the Special
Servicer" above.
In general, the series _____ certificateholders entitled to at least
_____% of the voting rights allocated to each class of series _____ certificates
affected by any event of default may waive the event of default. However, the
events of default described in the _____ bullet points under "--Events of
Default" above may only be waived by all of the holders of the affected classes
of the series _____ certificates. Furthermore, if the trustee is required to
spend any monies in connection with any event of default, then that event of
default may not be waived unless and until the trustee has been reimbursed, with
interest, by the defaulting party. Upon any waiver of an event of default, the
event of default will cease to exist and will be deemed to have been remedied
for every purpose under the pooling and servicing agreement.
DESCRIPTION OF THE OFFERED CERTIFICATES
GENERAL
The series _____ certificates will be issued, on or about
____________________, under the pooling and servicing agreement. They will
represent the entire beneficial ownership interest of the trust. The assets of
the trust will include:
- the pooled mortgage loans;
- any and all payments under and proceeds of the pooled mortgage
loans received after the cut-off date, exclusive of payments
of principal, interest and other amounts due on or before that
date;
- the loan documents for the pooled mortgage loans;
- any REO Properties acquired by the trust with respect to
defaulted mortgage loans; and
- those funds or assets as from time to time are deposited in
the master servicer's custodial account, the special
servicer's REO account, the trustee's collection account
described under "--Collection Account" below or the trustee's
interest reserve account described under "--Payments--Interest
Reserve Account" below.
The series _____ certificates will include the following classes:
S-110
<PAGE>
- the A-1, A-2, B, C, D, E, F and X classes, which are the
classes of series _____ certificates that are offered by this
prospectus supplement, and
- the G, H, J, K, L, M, N, R-I, R-II and R-III classes, which
are the classes of series _____ certificates that--
1. will be retained or privately placed by us, and
2. are not offered by this prospectus supplement.
S-111
<PAGE>
The class A-1, A-2, B, C, D, E, F, G, H, J, K, L, M and N
certificates are the only certificates that will have principal balances. The
principal balance of any of these certificates will represent the total
payments of principal to which the holder of the certificate is entitled over
time out of payments, or advances in lieu of payments, and other collections
on the assets of the trust. Accordingly, on each payment date, the principal
balance of each of these certificates will be permanently reduced by any
payments of principal actually made with respect to the certificate on that
payment date. See "--Payments" below. On any particular payment date, the
principal balance of each of these certificates may also be permanently
reduced, without any corresponding payment, in connection with losses on the
underlying mortgage loans and default-related and otherwise unanticipated
expenses of the trust. See "--Reductions in Certificate Principal Balances in
Connection with Realized Losses and Additional Trust Fund Expenses" below.
S-112
<PAGE>
The class X certificates will not have principal balances, and the
holders of the class X certificates will not be entitled to receive payments of
principal. However, each class X certificate will have a notional amount for
purposes of calculating the accrual of interest with respect to that
certificate. The total notional amount of all the class X certificates will
equal the total principal balance of all the class A-1, A-2, B, C, D, E, F, G,
H, J, K, L, M and N certificates outstanding from time to time.
In general, principal balances and notional amounts will be reported on
a class-by-class basis. In order to determine the principal balance or notional
amount of any of your offered certificates from time to time, you may multiply
the original principal balance or notional amount of that certificate as of the
date of initial issuance of the offered certificates, as specified on the face
of that certificate, by the then-applicable certificate factor for the relevant
class. The certificate factor for any class of offered certificates, as of any
date of determination, will equal a fraction, expressed as a percentage, the
numerator of which will be the then outstanding total principal balance or
notional amount, as applicable, of that class, and the denominator of which will
be the original total principal balance or notional amount, as applicable, of
that class. Certificate factors will be reported monthly in the trustee's
payment date statement.
REGISTRATION AND DENOMINATIONS
GENERAL. The offered certificates will be issued in book-entry form in
original denominations of:
- in the case of the class X certificates, $________ initial
notional amount and in any whole dollar denomination in excess
of $________; and
- in the case of the other offered certificates, $________
initial principal balance and in any whole dollar denomination
in excess of $________.
Each class of offered certificates will initially be represented by one
or more certificates registered in the name of Cede & Co., as nominee of The
Depository Trust Company. You will not be entitled to receive an offered
certificate issued in fully registered, certificated form, except under the
limited circumstances described in the accompanying prospectus under
"Description of the Certificates--Book-Entry Registration". For so long as any
class of offered certificates is held in book-entry form--
- all references to actions by holders of those certificates
will refer to actions taken by DTC upon instructions received
from beneficial owners of those certificates through its
participating organizations, and
- all references in this prospectus supplement to payments,
notices, reports, statements and other information to holders
of those certificates will refer to payments, notices, reports
and statements to DTC or Cede & Co., as the registered holder
of those certificates, for payment to beneficial owners of
offered certificates through its participating organizations
in accordance with DTC's procedures.
S-113
<PAGE>
The trustee will initially serve as registrar for purposes of providing
for the registration of the offered certificates and, if and to the extent
physical certificates are issued to the actual beneficial owners of any of the
offered certificates, the registration of transfers and exchanges of those
certificates.
For a discussion of DTC, see "Description of the
Certificates--Book-Entry Registration" in the accompanying prospectus.
COLLECTION ACCOUNT
GENERAL. The trustee must establish and maintain an account in which it
will hold funds pending their payment on the series _____ certificates and from
which it will make those payments. That collection account must be maintained in
a manner and with a depository institution that satisfies rating agency
standards for securitizations similar to the one involving the offered
certificates. Funds held in the trustee's collection account will remain
uninvested.
DEPOSITS. On the business day prior to each payment date, the master
servicer will be required to remit to the trustee for deposit in the collection
account the following funds:
- All payments and other collections on the mortgage loans and
any REO Properties in the trust that are then on deposit in
the master servicer's custodial account, exclusive of any
portion of those payments and other collections that
represents one or more of the following:
1. monthly debt service payments due on a due date
subsequent to the end of the related collection
period;
2. payments and other collections received after the end
of the related collection period;
3. amounts that are payable or reimbursable from the
master servicer's custodial account to any person
other than the series _____ certificateholders,
including--
- amounts payable to the master servicer or
the special servicer as compensation,
including master servicing fees, special
servicing fees, workout fees, liquidation
fees, assumption fees, modification fees
and, to the extent not otherwise applied to
cover interest on advances, Default Interest
and late payment charges,
- amounts payable in reimbursement of
outstanding advances, together with interest
on those advances, and
- amounts payable with respect to other
expenses of the trust; and
4. amounts deposited in the master servicer's custodial
account in error.
S-114
<PAGE>
- Any advances of delinquent monthly debt service payments
made with respect to that payment date.
- Any payments made by the master servicer to cover
Prepayment Interest Shortfalls incurred during the
related collection period.
See "--Advances of Delinquent Monthly Debt Service Payments" below and
"Servicing of the Underlying Mortgage Loans--Custodial Account" and
"Servicing and Other Compensation and Payment of Expenses" in this prospectus
supplement.
With respect to each payment date that occurs during March, commencing
in March ______, the trustee will be required to transfer from its interest
reserve account, which we describe under "--Interest Reserve Account" below, to
its collection account the interest reserve amounts that are then being held in
that interest reserve account with respect to those pooled mortgage loans that
accrue interest on an actual/360 basis.
WITHDRAWALS. The trustee may from time to time make withdrawals from
its collection account for any of the following purposes:
- to pay itself a monthly fee which is described under "--The
Trustee" below;
- to indemnify itself and various related persons as described
under "Description of the Governing Documents--Matters
Regarding the Trustee" in the accompanying prospectus;
- to pay for any opinions of counsel required to be obtained in
connection with any amendments to the pooling and servicing
agreement;
- to pay any federal, state and local taxes imposed on the
trust, its assets and/or transactions, together with all
incidental costs and expenses, that are required to be borne
by the trust as described under "Federal Income Tax
Consequences--REMICs--Prohibited Transactions Tax and Other
Taxes" in the accompanying prospectus and "Servicing of the
Underlying Mortgage Loans--REO Properties" in this prospectus
supplement;
- with respect to each payment date during February of any year
or during January of any year that is not a leap year,
commencing in ______, to transfer to the trustee's interest
reserve account the interest reserve amounts required to be so
transferred in that month with respect to those pooled
mortgage loans that accrue interest on an actual/360 basis;
and
- to pay to the person entitled thereto any amounts deposited in
the collection account in error.
On each payment date, all amounts on deposit in the trustee's
collection account, exclusive of any portion of those amounts that are to be
withdrawn for the purposes contemplated in the foregoing paragraph, will be
withdrawn and applied to make payments on the series _____ certificates. For any
payment date, those
S-115
<PAGE>
funds will consist of three separate components--
- the portion of those funds that represent prepayment
consideration collected on the pooled mortgage loans as a
result of voluntary or involuntary prepayments that occurred
during the related collection period, which will be paid to
the holders of the offered certificates as described under
"--Payments--Payments of Prepayment Premiums and Yield
Maintenance Charges" below,
- the portion of those funds that represent Post-ARD Additional
Interest collected on the ARD Loans in the trust during the
related collection period, which will be paid to the holders
of the class _____ certificates as described under
"--Payments--Payments of Post-ARD Additional Interest" below,
and
- the remaining portion of those funds, which ___
(i) we refer to as the "Available P&I Funds", and
(ii) which will be paid to the holders of all the series
_____ certificates, [other than the class _____
certificates], as described under "--Payments--Priority of
Payments" below.
INTEREST RESERVE ACCOUNT
The trustee must maintain an account in which it will hold the interest
reserve amounts described in the next paragraph with respect to those underlying
mortgage loans that accrue interest on an actual/360 basis. That interest
reserve account must be maintained in a manner and with a depository that
satisfies rating agency standards for similar securitizations as the one
involving the offered certificates. Funds held in the trustee's interest reserve
account will remain uninvested.
During January, except in a leap year, and February of each calendar
year, beginning in ______, the trustee will, on or before the payment date in
that month, withdraw from its collection account and deposit in its interest
reserve account the interest reserve amounts with respect to those underlying
mortgage loans that accrue interest on an actual/360 basis and for which the
monthly debt service payment due in that month was either received or advanced.
That interest reserve amount for each of those mortgage loans will equal one
day's interest accrued at the related mortgage interest rate on the Stated
Principal Balance of that loan as of the end of the related collection period.
During March of each calendar year, beginning in ______, the trustee
will, on or before the payment date in that month, withdraw from its interest
reserve account and deposit in its collection account any and all interest
reserve amounts then on deposit in the interest reserve account with respect to
those underlying mortgage loans that accrue interest on an actual/360 basis. All
interest reserve
S-116
<PAGE>
amounts that are so transferred from the interest reserve account to the
collection account will be included in the Available P&I Funds for the payment
date during the month of transfer.
PAYMENTS
GENERAL. On each payment date, the trustee will, subject to the
available funds, make all payments required to be made on the series _____
certificates on that date to the holders of record as of the close of business
on the last business day of the calendar month preceding the month in which
those payments are to occur. The final payment of principal and/or interest on
any offered certificate, however, will be made only upon presentation and
surrender of that certificate at the location to be specified in a notice of the
pendency of that final payment.
In order for a series _____ certificateholder to receive payments by
wire transfer on and after any particular payment date, that certificateholder
must provide the trustee with written wiring instructions no later than the last
day of the calendar month preceding the month in which that payment date occurs.
Otherwise, that certificateholder will receive its payments by check mailed to
it.
Cede & Co. will be the registered holder of your offered certificates,
and you will receive payments on your offered certificates through DTC and its
participating organizations, until physical certificates are issued to the
actual beneficial owners. See "--Registration and Denominations" above.
PAYMENTS OF INTEREST. All of the classes of the series _____
certificates will bear interest, except for the R-I, R-II and R-III classes.
With respect to each interest-bearing class of the series _____
certificates, that interest will accrue during each interest accrual period
based upon--
- the pass-through rate for that class and the related payment
date,
- the total principal balance or notional amount, as the case
may be, of that class outstanding immediately prior to the
related payment date, and
- the assumption that each year consists of twelve 30-day
months.
On each payment date, subject to the Available P&I Funds for that date
and the priorities of payment described under "--Payments--Priority of Payments"
below, the holders of each interest-bearing class of the series _____
certificates will be entitled to receive--
- the total amount of interest accrued during the related
interest accrual period with respect to that class of
certificates, reduced by
- the portion of any Net Aggregate Prepayment Interest Shortfall
for that payment date that is allocable to that class of
certificates.
S-117
<PAGE>
If the holders of any interest-bearing class of the series _____
certificates do not receive all of the interest to which they are entitled on
any payment date, then they will continue to be entitled to receive the unpaid
portion of that interest on future payment dates, subject to the Available P&I
Funds for those future payment dates and the priorities of payment described
under "--Payments--Priority of Payments" below.
The portion of any Net Aggregate Prepayment Interest Shortfall for any
payment date that is allocable to any particular interest-bearing class of the
series _____ certificates will equal the product of--
- the total amount of interest accrued during the related
interest accrual period with respect to that class of
certificates, multiplied by
- a fraction, the numerator of which is the total amount of
interest accrued during the related interest accrual period
with respect to that class of certificates, and the
denominator of which is the total amount of interest accrued
during the related interest accrual period with respect to all
of the interest-bearing classes of the series _____
certificates.
CALCULATION OF PASS-THROUGH RATES.
GENERAL. The pass-through rate for each class of the series _____
certificates, other than the class X certificates, will be [fixed] at the rate
per annum set forth with respect to each of those classes in the table on page
S-____.
The pass-through rate applicable to the class X certificates for each
payment date will equal the excess, if any, of--
- the Weighted Average Pool Pass-Through Rate for that payment
date, over
- the weighted average of the pass-through rates for each of the
other interest-bearing classes of the series _____
certificates for that payment date, weighted on the basis of
the relative total principal balances of those other classes
of series _____ certificates outstanding immediately prior to
that payment date.
S-118
<PAGE>
The calculation of the Weighted Average Pool Pass-Through Rate will be
unaffected by any change in the mortgage interest rate for any mortgage loan,
including in connection with any bankruptcy or insolvency of the related
borrower or any modification of that mortgage loan agreed to by the master
servicer or the special servicer.
S-119
<PAGE>
The class R-I, R-II and R-III certificates will not be interest-bearing
and, therefore, will not have pass-through rates.
PAYMENTS OF PRINCIPAL. Subject to the Available P&I Funds and the
priority of payments described under "--Payments--Priority of Payments" below,
the total amount of principal payable with respect to each class of the series
_____ certificates, other than the class X, R-I, R-II and R-III certificates, on
each payment date will equal that class's allocable share of the Total Principal
Payment Amount for that payment date.
In general, the portion of the Total Principal Payment Amount that will
be allocated to the class A-1 and A-2 certificates on each payment date will
equal:
- in the case of the class A-1 certificates, the lesser of--
1. the entire Total Principal Payment Amount for that
payment date and
S-120
<PAGE>
2. the total principal balance of the class A-1
certificates immediately prior to that payment date;
and
- in the case of the class A-2 certificates, the lesser of--
1. the entire Total Principal Payment Amount for that
payment date, reduced by any portion of that amount
allocable to the class A-1 certificates as described
in the preceding bullet point, and
2. the total principal balance of the class A-2
certificates immediately prior to that payment date.
However, if both of those classes are outstanding at a time when the
total principal balance of the class B, C, D, E, F, G, H, J, K, L, M and N
certificates has been reduced to zero as described under "--Reductions to
Certificate Principal Balances in Connection With Realized Losses and Additional
Trust Fund Expenses" below, then the Total Principal Payment Amount for each
payment date thereafter will be allocable between those two classes on a PRO
RATA basis in accordance with their respective total principal balances
immediately prior to that payment date, in each case up to that total principal
balance.
While the class A-1 and A-2 certificates are outstanding, no portion of
the Total Principal Payment Amount for any payment date will be allocated to any
other class of series _____ certificates.
Following the retirement of the class A-1 and A-2 certificates, the
Total Principal Payment Amount for each payment date will be allocated to the
respective classes of series _____ certificates identified in the table below
and in the order of priority set forth in that table, in each case up to the
lesser of--
S-121
<PAGE>
- the portion of that Total Principal Payment Amount that
remains unallocated, and
- the total principal balance of the particular class
immediately prior to that payment date.
<TABLE>
<CAPTION>
ORDER OF ALLOCATION CLASS
<S> <C>
1 B
2 C
3 D
4 E
5 F
6 G
7 H
8 J
9 K
10 L
11 M
12 N
</TABLE>
In no event will the holders of any class of series _____ certificates
listed in the foregoing table be entitled to receive any payments of principal
until the total principal balance of the class A-1 and A-2 certificates is
reduced to zero. Furthermore, in no event will the holders of any class of
series _____ certificates listed in the foregoing table be entitled to receive
any payments of principal until the total principal balance of all other classes
of series _____ certificates, if any, listed above it in the foregoing table is
reduced to zero.
REIMBURSEMENT AMOUNTS. As discussed under "--Reductions of Certificate
Principal Balances in Connection with Realized Losses and Additional Trust Fund
Expenses" below, the total principal balance of any class of series _____
certificates, other than the class X, R-I, R-II and R-III certificates, may be
reduced without a corresponding payment of principal. If that occurs with
respect to any class of series _____ certificates, other than the class X, R-I,
R-II and R-III certificates, then, subject to Available P&I Funds and the
priority of payment
S-122
<PAGE>
described under "--Payments--Priority of Payments" below,
the holders of that class will be entitled to be reimbursed for the amount of
that reduction, WITHOUT INTEREST. References to the "loss reimbursement amount"
under "--Payments--Priority of Payments" below mean, in the case of any class of
series _____ certificates, other than the class X, R-I, R-II and R-III
certificates, for any payment date, the total amount to which the holders of
that class are entitled as reimbursement for all previously unreimbursed
reductions, if any, made in the total principal balance of that class on all
prior payment dates as discussed under "--Reductions of Certificate Principal
Balances in Connection with Realized Losses and Additional Trust Fund Expenses"
below.
PRIORITY OF PAYMENTS. On each payment date, the trustee will apply the
Available P&I Funds for that date to make the following payments in the
following order of priority, in each case to the extent of the remaining
Available P&I Funds:
<TABLE>
<CAPTION>
ORDER OF RECIPIENT
PAYMENT CLASS OR CLASSES TYPE AND AMOUNT OF PAYMENT
<S> <C> <C>
1 A-1, A-2 and X Interest up to the total interest payable
on those classes, PRO RATA based on
entitlement
2 A-1 and A-2 Principal up to the total principal
payable on those classes, allocable as
between those classes as described
immediately following this table
3 A-1 and A-2 Reimbursement up to the reimbursement
amounts for those classes, PRO RATA based
on entitlement as described immediately
following this table
4 B Interest up to the total interest payable
on that class
5 B Principal up to the total principal
payable on that class
6 B Reimbursement up to the loss reimbursement
amount for that class
7 C Interest up to the total interest payable
on that class
8 C Principal up to the total principal
payable on that class
9 C Reimbursement up to the loss reimbursement
amount for that class
</TABLE>
S-123
<PAGE>
<TABLE>
<CAPTION>
ORDER OF RECIPIENT
PAYMENT CLASS OR CLASSES TYPE AND AMOUNT OF PAYMENT
<S> <C> <C>
10 D Interest up to the total interest payable
on that class
11 D Principal up to the total principal
payable on that class
12 D Reimbursement up to the loss reimbursement
amount for that class
13 E Interest up to the total interest payable
on that class
14 E Principal up to the total principal
payable on that class
15 E Reimbursement up to the loss reimbursement
amount for that class
16 F Interest up to the total interest payable
on that class
17 F Principal up to the total principal
payable on that class
18 F Reimbursement up to the loss reimbursement
amount for that class
19 G Interest up to the total interest payable
on that class
20 G Principal up to the total principal
payable on that class
21 G Reimbursement up to the loss reimbursement
amount for that class
22 H Interest up to the total interest payable
on that class
23 H Principal up to the total principal
payable on that class
24 H Reimbursement up to the loss reimbursement
amount for that class
25 J Interest up to the total interest payable
on that class
26 J Principal up to the total principal
payable on that class
27 J Reimbursement up to the loss reimbursement
amount for that class
28 K Interest up to the total interest payable
on that class
29 K Principal up to the total principal
payable on that class
30 K Reimbursement up to the loss reimbursement
amount for that class
</TABLE>
S-124
<PAGE>
<TABLE>
<CAPTION>
ORDER OF RECIPIENT
PAYMENT CLASS OR CLASSES TYPE AND AMOUNT OF PAYMENT
<S> <C> <C>
31 L Interest up to the total interest payable
on that class
32 L Principal up to the total principal
payable on that class
33 L Reimbursement up to the loss reimbursement
amount for that class
34 M Interest up to the total interest payable
on that class
35 M Principal up to the total principal
payable on that class
36 M Reimbursement up to the loss reimbursement
amount for that class
37 N Interest up to the total interest payable
on that class
38 N Principal up to the total principal
payable on that class
39 N Reimbursement up to the loss reimbursement
amount for that class
40 R-I, R-II and R-III Any remaining Available P&I Funds
</TABLE>
In general, no payments of principal will be made with respect to the
class A-2 certificates until the total principal balance of the class A-1
certificates is reduced to zero. However, if both of those classes are
outstanding at a time when the total principal balance of the class B, C, D, E,
F, G, H, J, K, L, M and N certificates has been reduced to zero as described
under "--Reductions to Certificate Principal Balances in Connection With
Realized Losses and Additional Trust Fund Expenses" below, payments of principal
on the class A-1 certificates and the class A-2 certificates will be made on a
PRO RATA basis in accordance with the respective total principal balances of
those classes then outstanding.
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<PAGE>
PAYMENTS OF PREPAYMENT PREMIUMS AND YIELD MAINTENANCE CHARGES. If any
prepayment consideration is collected during any particular collection period
with respect to any mortgage loan in the trust, regardless of whether that
prepayment consideration is calculated as a percentage of the amount prepaid or
in accordance with a yield maintenance formula, then on the payment date
corresponding to that collection period, the trustee will pay a portion of that
prepayment consideration to the holders of each class of series ___
certificates, if any, that--
- is senior to the class _____ certificates, and
- is entitled to payments of principal on that payment date,
up to an amount equal to the product of--
- the full amount of that prepayment consideration, net of
workout fees and liquidation fees payable from it, multiplied
by
- a fraction, which in no event may be greater than 1.0, the
numerator of which is equal to the excess, if any, of the
pass-through rate for that class of certificates over the
relevant discount rate, and the denominator of which is equal
to the excess, if any, of the mortgage interest rate of the
prepaid mortgage loan over the relevant discount rate, and
further multiplied by
- a fraction, the numerator of which is equal to the amount of
principal payable to that class of certificates on that
payment date, and the denominator of which is the Total
Principal Payment Amount for that payment date.
S-126
<PAGE>
The discount rate applicable to any class of series ___ certificates
with respect to any prepaid mortgage loan will equal the yield, when compounded
monthly, on the U.S. Treasury issue, primary issue, with a maturity date closest
to the maturity date or anticipated repayment date, as applicable, for the
prepaid mortgage loan. In the event that there are two U.S. Treasury issues--
- with the same coupon, the issue with the lower yield will be
utilized, or
- with maturity dates equally close to the maturity date for the
prepaid mortgage loan, the issue with the earliest maturity
date will be utilized.
The trustee will thereafter pay any remaining portion of the prepayment
consideration, net of workout fees and workout fees payable from it, to the
holders of the class X certificates. After the payment date on which the total
principal balance of all classes of series ___ certificates, other than the
class X certificates, senior to the class _____ certificates has been reduced to
zero, the trustee will pay any prepayment consideration, net of workout fees and
liquidation fees payable from it, collected on the pooled mortgage loans,
entirely to the holders of the class X certificates.
Neither we nor the underwriter makes any representation as to--
- the enforceability of the provision of any promissory note
evidencing one of the mortgage loans requiring the payment of
a prepayment premium or yield maintenance charge, or
- the collectability of any prepayment premium or yield
maintenance charge.
See "Description of the Mortgage Pool--Terms and Conditions of the Mortgage
Loans--Prepayment Provisions" in this prospectus supplement.
PAYMENTS OF ADDITIONAL INTEREST. The class _____ certificates will
entitle the holders to all amounts, if any, applied as Post-ARD Additional
Interest collected on the ARD Loans in the trust.
TREATMENT OF REO PROPERTIES. Notwithstanding that any mortgaged real
property may be acquired as part of the trust assets through foreclosure, deed
in lieu of foreclosure or otherwise, the related mortgage loan will be treated
as having remained outstanding, until the REO Property is liquidated, for
purposes of determining--
- payments on the series _____ certificates,
- allocations of Realized Losses and Additional Trust Fund
Expenses to the series _____ certificates, and
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<PAGE>
- the amount of all fees payable to the master servicer, the
special servicer and the trustee under the pooling and
servicing agreement.
In connection with the foregoing, that mortgage loan will be taken into account
when determining the Weighted Average Pool Pass-Through Rate and the Total
Principal Payment Amount for each payment date.
Operating revenues and other proceeds derived from an REO Property will
be applied--
- FIRST, to pay, or to reimburse the master servicer, the
special servicer and/or the trustee for the payment of, some
of the costs and expenses incurred in connection with the
operation and disposition of the REO Property, and
- THEREAFTER, as collections of principal, interest and other
amounts "due" on the related mortgage loan.
To the extent described under "--Advances of Delinquent Monthly Debt
Service Payments" below, the master servicer and the trustee will be required to
advance delinquent monthly debt service payments with respect to each pooled
mortgage loan as to which the corresponding mortgaged real property has become
an REO Property, in all cases as if the mortgage loan had remained outstanding.
S-128
<PAGE>
REDUCTIONS TO CERTIFICATE PRINCIPAL BALANCES IN CONNECTION WITH REALIZED LOSSES
AND ADDITIONAL TRUST FUND EXPENSES
As a result of Realized Losses and Additional Trust Fund Expenses, the
total Stated Principal Balance of the mortgage pool may decline below the total
principal balance of the series ___ certificates. If this occurs following the
payments made to the certificateholders on any payment date, then the respective
total principal balances of the following classes of the series ___ certificates
are to be successively reduced in the following order, until the total principal
balance of those classes of certificates equals the total Stated Principal
Balance of the mortgage pool that will be outstanding immediately following that
payment date.
<TABLE>
<CAPTION>
ORDER OF ALLOCATION CLASS
<S> <C>
1 N
2 M
3 L
4 K
5 J
6 H
7 G
8 F
9 E
10 D
11 C
12 B
13 A-1 and A-2, PRO RATA based on
total principal balances.
</TABLE>
The reductions in the total principal balances of the respective
classes of series ___ certificates with principal balances, as described in the
previous paragraph, will represent an allocation of the Realized Losses and/or
Additional Trust Fund Expenses that caused the particular mismatch in balances
between the pooled mortgage loans and those classes of certificates. A reduction
of this type in the total principal balance of any of the foregoing classes of
series ____certificates will result in a corresponding reduction in the total
notional amount of the class X certificates.
The Realized Loss with
S-129
<PAGE>
respect to a liquidated mortgage loan, or
related REO Property, is an amount generally equal to the excess, if any, of:
- the outstanding principal balance of the mortgage loan as of
the date of liquidation, together with--
1. all accrued and unpaid interest on the mortgage loan
to but not including the due date in the collection
period in which the liquidation occurred, exclusive,
however, of any portion of that interest that
represents Default Interest or Post-ARD Additional
Interest, and
2. all related unreimbursed servicing advances and
unpaid liquidation expenses, over
- the total amount of liquidation proceeds, if any, recovered in
connection with the liquidation.
If any portion of the debt due under a mortgage loan is forgiven, whether in
connection with a modification, waiver or amendment granted or agreed to by the
master servicer or the special servicer or in connection with the bankruptcy,
insolvency or similar proceeding involving the related borrower, the amount
forgiven, other than Default Interest and Post-ARD Additional Interest, also
will be treated as a Realized Loss.
Some examples of Additional Trust Fund Expenses are:
- any special servicing fees, workout fees and liquidation fees
paid to the special servicer;
- any interest paid to the master servicer, the special servicer
and/or the trustee with respect to unreimbursed advances,
which interest payment is not covered out of late payment
charges and Default Interest actually collected on the related
mortgage loan in the trust;
- the cost of various opinions of counsel required or permitted
to be obtained in connection with the servicing of the pooled
mortgage loans and the administration of the other trust
assets;
- any unanticipated, non-mortgage loan specific expenses of the
trust, including--
1. any reimbursements and indemnifications to the
trustee described under "Description of the Governing
Documents--Matters Regarding the Trustee" in the
accompanying prospectus,
S-130
<PAGE>
2. any reimbursements and indemnification to the master
servicer, the special servicer and us described under
"Description of the Governing Documents--Matters
Regarding the Master Servicer, the Special Servicer,
the Manager and Us" in the accompanying prospectus,
and
3. any federal, state and local taxes, and tax-related
expenses, payable out of the trust assets, as
described under "Federal Income Tax
Consequences--REMICs--Prohibited Transactions Tax and
Other Taxes" in the accompanying prospectus;
- rating agency fees, other than on-going surveillance fees,
that cannot be recovered from the borrower; and
- any amounts expended on behalf of the trust to remediate an
adverse environmental condition at any mortgaged real property
securing a defaulted mortgage loan as described under
"Servicing of the Underlying Mortgage Loans--Realization Upon
Defaulted Mortgage Loans" in this prospectus supplement.
ADVANCES OF DELINQUENT MONTHLY DEBT SERVICE PAYMENTS
The master servicer will be required to make, for each payment date, a
total amount of advances of principal and/or interest generally equal to all
monthly debt service payments other than balloon payments, and assumed monthly
debt service payments, in each case net of related master servicing fees, that-
- WERE DUE OR DEEMED DUE, AS THE CASE MAY BE, WITH RESPECT TO
THE MORTGAGE POOLED LOANS DURING THE RELATED COLLECTION
PERIOD, AND
- WERE NOT PAID BY OR ON BEHALF OF THE RESPECTIVE BORROWERS OR
OTHERWISE COLLECTED AS OF THE CLOSE OF BUSINESS ON THE LAST
DAY OF THE RELATED COLLECTION PERIOD.
NOTWITHSTANDING THE FOREGOING, IF IT IS DETERMINED THAT AN APPRAISAL
REDUCTION AMOUNT EXISTS WITH RESPECT TO ANY MORTGAGE LOAN IN THE TRUST, THEN THE
MASTER SERVICER WILL REDUCE THE INTEREST PORTION, BUT NOT THE PRINCIPAL PORTION,
OF EACH P&I ADVANCE THAT IT MUST MAKE WITH RESPECT TO THAT MORTGAGE LOAN DURING
THE PERIOD THAT THE APPRAISAL REDUCTION AMOUNT EXISTS. THE INTEREST PORTION OF
ANY P&I ADVANCE REQUIRED TO BE MADE WITH RESPECT TO ANY MORTGAGE LOAN AS TO
WHICH THERE EXISTS AN APPRAISAL REDUCTION AMOUNT, WILL EQUAL THE PRODUCT OF:
- THE AMOUNT OF THE INTEREST PORTION OF THAT P&I ADVANCE THAT
WOULD OTHERWISE BE REQUIRED TO BE MADE FOR THE SUBJECT PAYMENT
DATE WITHOUT REGARD TO THIS SENTENCE AND THE PRIOR SENTENCE,
MULTIPLIED BY
- A FRACTION, THE NUMERATOR OF WHICH IS EQUAL TO THE STATED
PRINCIPAL BALANCE OF THE MORTGAGE LOAN, NET OF THE APPRAISAL
REDUCTION AMOUNT, AND THE DENOMINATOR OF WHICH IS EQUAL TO THE
S-131
<PAGE>
STATED PRINCIPAL BALANCE OF THE MORTGAGE LOAN
WITH RESPECT TO ANY PAYMENT DATE, THE MASTER SERVICER WILL BE REQUIRED
TO MAKE P&I ADVANCES EITHER OUT OF ITS OWN FUNDS OR, SUBJECT TO THE REPLACEMENT
AS AND TO THE EXTENT PROVIDED IN THE POOLING AND SERVICING AGREEMENT, FUNDS
HELD IN THE MASTER SERVICER'S CUSTODIAL ACCOUNT THAT ARE NOT REQUIRED TO BE
PAID ON THE SERIES ___ CERTIFICATES ON THAT PAYMENT DATE.
THE TRUSTEE WILL BE REQUIRED TO MAKE ANY P&I ADVANCE THAT THE MASTER
SERVICER FAILS TO MAKE. SEE "--THE TRUSTEE" BELOW.
THE MASTER SERVICER AND THE TRUSTEE WILL EACH BE ENTITLED TO RECOVER
ANY P&I ADVANCE MADE BY IT, OUT OF ITS OWN FUNDS, FROM COLLECTIONS ON THE
MORTGAGE LOAN AS TO WHICH THE ADVANCE WAS MADE. NEITHER THE MASTER SERVICER NOR
THE TRUSTEE WILL BE OBLIGATED TO MAKE ANY P&I ADVANCE THAT, IN ITS JUDGMENT,
WOULD NOT ULTIMATELY BE RECOVERABLE OUT OF COLLECTIONS ON THE RELATED MORTGAGE
LOAN. IF THE MASTER SERVICER OR THE TRUSTEE MAKES ANY P&I ADVANCE THAT IT
SUBSEQUENTLY DETERMINES, IN ITS JUDGMENT, WILL NOT BE RECOVERABLE OUT OF
COLLECTIONS ON THE RELATED MORTGAGE LOAN, IT MAY OBTAIN REIMBURSEMENT FOR THAT
ADVANCE, TOGETHER WITH INTEREST ACCRUED ON THE ADVANCE AS DESCRIBED IN THE NEXT
PARAGRAPH, OUT OF GENERAL COLLECTIONS ON THE MORTGAGE LOANS AND ANY REO
PROPERTIES IN THE TRUST ON DEPOSIT IN THE MASTER SERVICER'S CUSTODIAL ACCOUNT
FROM TIME TO TIME. SEE "DESCRIPTION OF THE CERTIFICATES--ADVANCES" IN THE
ACCOMPANYING PROSPECTUS AND "SERVICING OF THE UNDERLYING MORTGAGE
LOANS--CUSTODIAL ACCOUNT" IN THIS PROSPECTUS SUPPLEMENT.
THE MASTER SERVICER AND THE TRUSTEE WILL EACH BE ENTITLED TO RECEIVE
INTEREST ON P&I ADVANCES MADE THEREBY OUT OF ITS OWN FUNDS. THAT INTEREST WILL
ACCRUE ON THE AMOUNT OF EACH P&I ADVANCE, AND COMPOUND MONTHLY, FOR SO LONG AS
THAT ADVANCE IS OUTSTANDING AT AN ANNUAL RATE EQUAL TO THE PRIME RATE AS
PUBLISHED IN THE MONEY RATES SECTION OF THE WALL STREET JOURNAL, as that
prime rate may change from time to time. Interest accrued with respect to any
P&I advance will be payable in the collection period in which that advance is
reimbursed--
- FIRST, out of Default Interest and late payment charges
collected on the related mortgage loan during that collection
period, and
- THEN, if and to the extent that the Default Interest and late
charges referred to in clause FIRST are insufficient to cover
the advance interest, out of any amounts then on deposit in
the master servicer's custodial account.
Any delay between a sub-servicer's receipt of a late collection of a
monthly debt service payment as to which a P&I advance was made and the
forwarding of that late collection to the master servicer, will increase the
amount of interest accrued and payable to the master servicer or the trustee, as
the case may be, on that P&I advance. To the extent not offset by Default
Interest and/or late payment charges accrued and actually collected, interest
accrued on outstanding P&I advances will result in a reduction in amounts
payable on the certificates.
S-132
<PAGE>
A monthly debt service payment will be assumed to be due with respect
to:
- each pooled mortgage loan that is delinquent with respect to
its balloon payment beyond the end of the collection period in
which its maturity date occurs and as to which no arrangements
have been agreed to for the collection of the delinquent
amounts, including an extension of maturity; and
- each pooled mortgage loan as to which the corresponding
mortgaged real property has become an REO Property.
The assumed monthly debt service payment deemed due on any mortgage loan
described in the prior sentence that is delinquent as to its balloon payment,
will equal, for its stated maturity date and for each successive due date that
it remains outstanding and part of the trust, the monthly debt service payment
that would have been due on the mortgage loan on the relevant date if the
related balloon payment had not come due and the mortgage loan had, instead,
continued to amortize and accrue interest according to its terms in effect prior
to that stated maturity date. The assumed monthly debt service payment deemed
due on any mortgage loan described in the second preceding sentence as to which
the related mortgaged real property has become an REO Property, will equal, for
each due date that the REO Property remains part of the trust, the monthly debt
service payment or, in the case of a mortgage loan delinquent with respect to
its balloon payment, the assumed monthly debt service payment due or deemed due
on the last due date prior to the acquisition of that REO Property. [Assumed
monthly debt service payments for ARD Loans do not include Post-ARD Additional
Interest or accelerated amortization payments.]
REPORTS TO CERTIFICATEHOLDERS; CERTAIN AVAILABLE INFORMATION
CERTIFICATEHOLDER REPORTS. Based solely on information provided in
monthly reports prepared by the master servicer and the special servicer and
delivered to the trustee, the trustee will be required to deliver or otherwise
make available as described under "--Information Available Electronically"
below, on each payment date, to each registered holder of an offered certificate
and to each beneficial owner of an offered certificate held in book-entry form
that is identified to the reasonable satisfaction of the trustee:
- A Payment Date Statement setting forth, among other things:
[LIST INFORMATION TO BE DISCLOSED]
- A CMSA Loan Periodic Update File and a CMSA Property File
setting forth information with respect to the pooled mortgage
loans and the corresponding mortgaged real properties,
respectively.
S-133
<PAGE>
- A Mortgage Pool Data Update Report, which may be included as
part of the Payment Date Statement, containing information
regarding the pooled mortgage loans as of the end of the
related collection period.
The master servicer or the special servicer, as specified in the
pooling and servicing agreement, is required to deliver to the trustee monthly,
and the trustee is required to make available as described below under
"--Information Available Electronically," a copy of each of the following
reports with respect to the pooled mortgage loans and the corresponding
mortgaged properties:
- A Delinquent Loan Status Report containing substantially the
information set forth in Annex D to this prospectus
supplement.
- An Historical Loan Modification Report containing
substantially the information set forth in Annex E to this
prospectus supplement.
- An Historical Liquidation Report containing substantially
the information set forth in Annex F to this prospectus
supplement.
- An REO Status Report containing substantially the
information set forth in Annex G to this prospectus
supplement.
- A Servicer Watch List containing substantially the content
set forth in Annex H to this prospectus supplement.
- A Loan Payoff Notification Report setting forth, among other
things, for each mortgage loan where written notice of
anticipated payoff has been received as of the determination
date at least two business days prior to the preparation of
the report, the control number, the property name, the amount
of principal expected to be paid, the expected date of payment
and the estimated amount of the yield maintenance charge or
prepayment premium due.
- A Comparative Financial Status Report containing
substantially the information set forth in Annex K to this
prospectus supplement.
In addition, upon the request of any holder of a series _____
certificate or, to the extent identified to the reasonable satisfaction of the
trustee, beneficial owner of an offered certificate, the trustee will be
required to request from the master servicer, and, upon receipt, make available
to the requesting party, during normal business hours at the offices of the
trustee, copies of the following reports required to be prepared and maintained
by the master servicer and/or special servicer:
S-134
<PAGE>
- with respect to any mortgaged real property or REO Property,
an Operating Statement Analysis Report containing
substantially the information set forth in Annex I to this
prospectus supplement; and
- with respect to any mortgaged real property or REO Property,
an NOI Adjustment Worksheet containing substantially the
content set forth in Annex J to this prospectus supplement.
BOOK-ENTRY CERTIFICATES. If you hold your offered certificates in
book-entry from through DTC, you may obtain direct access to the monthly reports
of the trustee as if you were a certificateholder, provided that you deliver a
written certification to the trustee confirming your beneficial ownership in the
offered certificates. Otherwise, until definitive certificates are issued with
respect to your offered certificates, the information contained in those monthly
reports will be available to you only to the extent that it is made available
through DTC and the DTC participants or is available on the trustee's internet
website. Conveyance of notices and other communications by DTC to the DTC
participants, and by the DTC participants to beneficial owners of the offered
certificates, will be governed by arrangements among them, subject to any
statutory or regulatory requirements as may be in effect from time to time. We,
the master servicer, the special servicer, the trustee and the series ____
certificate registrar are required to recognize as certificateholders only those
persons in whose names the series ____ certificates are registered on the books
and records of the certificate registrar.
INFORMATION AVAILABLE ELECTRONICALLY. The trustee will make available
each month, to any interested party, the Payment Date Statement, any Mortgage
Pool Data Update Report, the CMSA Loan Periodic Update Files, the CMSA Loan
Setup Files, [SPECIFY OTHER REPORTS] via the trustee's internet website,
electronic bulletin board and fax-on-demand service. The trustee's internet
website will initially be located at "____________________".
The trustee's electronic bulletin board may be accessed by calling
___-___-____, and its fax-on- demand service may be accessed by calling
___-___-____. For assistance with regard to the services described above,
investors may call ___-___-____.
The trustee will make no representations or warranties as to the
accuracy or completeness of, and may disclaim responsibility for, any
information made available by the trustee for which it is not the original
source.
The trustee may require registration and the acceptance of a disclaimer
in connection with providing access to its electronic bulletin board and
internet website. The trustee shall not be liable for the dissemination of
information made in accordance with the pooling and servicing agreement.
OTHER INFORMATION. The pooling and servicing agreement will obligate
the trustee to make available at its offices, during normal business hours, upon
reasonable advance written notice, for review by any holder or beneficial owner
of an offered certificate or any person identified to the trustee
S-135
<PAGE>
as a prospective transferee of an offered certificate or any interest in that
offered certificate, originals or copies of, among other things, the following
items:
- the pooling and servicing agreement, including exhibits, and
any amendments to the pooling and servicing agreement;
- all monthly reports of the trustee delivered, or otherwise
electronically made available, to series ___
certificateholders since the date of initial issuance of the
offered certificates;
- all officer's certificates delivered to the trustee by the
master servicer and/or the special servicer since the date of
initial issuance of the certificates, as described under
"Servicing of the Underlying Mortgage Loans--Evidence as to
Compliance" in this prospectus supplement;
- all accountant's reports delivered to the trustee with respect
to the master servicer and/or the special servicer since the
date of initial issuance of the offered certificates, as
described under "Servicing of the Underlying Mortgage
Loans--Evidence as to Compliance" in this prospectus
supplement;
- the most recent inspection report with respect to each
mortgaged real property for a pooled mortgage loan prepared by
the master servicer or the special servicer and delivered to
the trustee as described under "Servicing of the Underlying
Mortgage Loans--Inspections; Collection of Operating
Information" in this prospectus supplement;
- the most recent appraisal, if any, with respect to each
mortgaged real property for a pooled mortgage loan obtained by
the master servicer or the special servicer and delivered to
the trustee;
- the most recent quarterly and annual operating statement and
rent roll for each mortgaged real property for a pooled
mortgage loan and financial statements of the related borrower
collected by the master servicer or the special servicer and
delivered to the trustee as described under "Servicing of the
Underlying Mortgage Loans--Inspections; Collection of
Operating Information" in this prospectus supplement; and
- the mortgage files, including all documents, such as
modifications, waivers and amendments of the pooled mortgage
loans, that are to be added to the mortgage files from time to
time.
S-136
<PAGE>
Copies of any and all of the foregoing items will be available from the
trustee upon request. However, the trustee will be permitted to require payment
of a sum sufficient to cover the reasonable costs and expenses of providing the
copies.
In connection with providing access to or copies of the items described
above, the trustee may require:
- in the case of a beneficial owner of an offered certificate
held in book-entry form, a written confirmation executed by
the requesting person or entity, in a form reasonably
acceptable to the trustee, generally to the effect that the
person or entity is a beneficial owner of offered certificates
and will keep the information confidential; and
- in the case of a prospective purchaser of an offered
certificate or any interest in that offered certificate,
confirmation executed by the requesting person or entity, in
a form reasonably acceptable to the trustee, generally to
the effect that the person or entity is a prospective
purchaser of offered certificates or an interest in offered
certificates, is requesting the information for use in
evaluating a possible investment in the offered certificates
and will otherwise keep the information confidential.
Registered holders of the offered certificates will be deemed to have agreed to
keep the information described above confidential by the acceptance of their
certificates.
VOTING RIGHTS
The voting rights for the series ___ certificates will be allocated as
follows: [SPECIFY ALLOCATION]. Voting rights allocated to a class of series ___
certificateholders will be allocated among those certificateholders in
proportion to their respective percentage interests in that class.
TERMINATION
The obligations created by the pooling and servicing agreement will
terminate following the earliest of--
1. the final payment or advance on, other liquidation of, the
last mortgage loan or related REO Property remaining in the
trust, and
2. the purchase of all of the mortgage loans and REO Properties
remaining in the trust by us, the master servicer, the special
servicer or any single certificateholder
S-137
<PAGE>
or group of certificateholders in the series ___ controlling
class, in that order of preference.
Written notice of termination of the pooling and servicing agreement
will be given to each series _____ certificateholder. The final payment with
respect to each series ___ certificate will be made only upon surrender and
cancellation of that certificate at the office of the series ___ certificate
registrar or at any other location specified in the notice of termination.
Any purchase by us, the master servicer, the special servicer or any
single holder or group of holders of the controlling class of all the mortgage
loans and REO Properties remaining in the trust is required to be made at a
price equal to:
- the sum of--
1. the total principal balance of all the mortgage loans
then included in the trust, other than any mortgage
loans as to which the mortgaged real properties have
become REO Properties, together with interest, other
than Default Interest and Post-ARD Additional
Interest, on and unreimbursed servicing advances for
those mortgage loans, and
2. the appraised value of all REO Properties then
included in the trust, as determined by an appraiser
mutually agreed upon by the master servicer, the
special servicer and the trustee, minus
- solely in the case of a purchase by the master servicer or the
special servicer, the total of all amounts payable or
reimbursable to the purchaser under the pooling and servicing
agreement.
The purchase will result in early retirement of the outstanding series ___
certificates. However, but the right of us, the master servicer, the special
servicer or any single holder or group of holders of the series ___ controlling
class to make the purchase is subject to the requirement that the total Stated
Principal Balance of the mortgage pool be less than ____% of the initial
mortgage pool balance. The termination price, exclusive of any portion of the
termination price payable or reimbursable to any person other than the series
___ certificateholders, will constitute part of the Available P&I Funds for the
final payment date. Any person or entity making the purchase will be responsible
for reimbursing the parties to the pooling and servicing agreement for all
reasonable out-of-pocket costs and expenses incurred by the parties in
connection with the purchase.
THE TRUSTEE
[INSERT DESCRIPTION OF TRUSTEE.]
The trustee is at all times required to be a corporation, bank, trust
company or association organized and doing business under the laws of the U.S.
or any State of the U.S. or the District of Columbia. In addition, the trustee
must at all times--
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- be authorized under those laws to exercise trust powers,
- have a combined capital and surplus of at least $50,000,000,
and
- be subject to supervision or examination by federal or state
authority.
If the corporation, bank, trust company or association publishes reports of
condition at least annually, in accordance with law or to the requirements of
the supervising or examining authority, then the combined capital and surplus
of the corporation, bank, trust company or association will be deemed to be its
combined capital and surplus as described in its most recent published report of
condition.
We, the master servicer, the special servicer and our and their
respective affiliates, may from time to time enter into normal banking and
trustee relationships with the trustee and its affiliates. The trustee and any
of its respective affiliates may hold series ___ certificates in their own
names. In addition, for purposes of meeting the legal requirements of some
local jurisdictions, the master servicer and the trustee acting jointly will
have the power to appoint a co-trustee or separate trustee of all or any part of
the trust assets. All rights, powers, duties and obligations conferred or
imposed upon the trustee will be conferred or imposed upon the trustee and the
separate trustee or co-trustee jointly, or in any jurisdiction in which the
trustee shall be incompetent or unqualified to perform some acts, singly upon
the separate trustee or co-trustee who shall exercise and perform its rights,
powers, duties and obligations solely at the direction of the trustee.
The trustee will be entitled to a monthly fee for its services, which
fee will accrue on a 30/360 basis at ____% per annum on the Stated Principal
Balance outstanding from time to time of each pooled mortgage loan. The trustee
fee is payable out of general collections on the mortgage loans and any REO
Properties in the trust.
See also "Description of the Governing Documents--The Trustee",
"--Duties of the Trustee", "--Matters Regarding the Trustee" and "--Resignation
and Removal of the Trustee" in the accompanying prospectus.
YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
GENERAL. The yield on any offered certificate will depend on:
(a) the price at which the certificate is purchased by an investor, and
(b) the rate, timing and amount of payments on the certificate.
The rate, timing and amount of payments on any offered certificate will
in turn depend on, among other things,
- the pass-through rate for the certificate,
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- the rate and timing of principal payments, including principal
prepayments, and other principal collections on the underlying
mortgage loans and the extent to which those amounts are to be
applied or otherwise result in reduction of the principal
balance or notional amount of the certificate,
- the rate, timing and severity of Realized Losses and
Additional Trust Fund Expenses and the extent to which those
losses and expenses result in the reduction of the principal
balance or notional amount of the certificate, and
- the timing and severity of any Net Aggregate Prepayment
Interest Shortfalls and the extent to which those shortfalls
result in the reduction of the interest payments on the
certificate.
PASS-THROUGH RATES. The pass-through rate for each class of offered
certificates other than the class X certificates, is [fixed]. However, the
pass-through rate applicable to the class X certificates will be variable and
will be calculated based in part on the weighted average mortgage pass-through
rate from time to time. Accordingly, the yield on the class X certificates will
be sensitive to changes in the relative composition of the mortgage pool as a
result of scheduled amortization, voluntary prepayments and liquidations of
underlying mortgage loans following default. In addition, the pass-through rate
for the class X certificates will vary with changes in the relative sizes of the
total principal balances of the other interest-bearing classes of the series ___
certificates. The weighted average mortgage pass-through rate and the
pass-through rate for the class X certificates will not be affected by
modifications, waivers and amendments with respect to the underlying mortgage
loans.
See "Description of the Offered Certificates--Payments--Calculation of
Pass-Through Rates" and "Description of the Mortgage Pool" in this prospectus
supplement and "--Rate and Timing of Principal Payments" below.
RATE AND TIMING OF PRINCIPAL PAYMENTS. The yield to maturity on the
class X certificates will be extremely sensitive to, and the yield to maturity
on any other offered certificates purchased at a discount or a premium will be
affected by, the rate and timing of principal payments made in reduction of the
total principal balances or notional amounts of the series ___ certificates. In
turn, the rate and timing of principal payments that are paid or otherwise
result in reduction of the total principal balance or notional amount, as the
case may be, of any offered certificate will be directly related to the rate and
timing of principal payments on or with respect to the underlying mortgage
loans. Finally, the rate and timing of principal payments on or with respect to
the underlying mortgage loans will be affected by their amortization schedules,
the dates on which balloon payments are due and the rate and timing of principal
prepayments and other unscheduled collections on them, including for this
purpose, collections made in connection with liquidations of mortgage loans due
to defaults, casualties or condemnations affecting the mortgaged real
properties, or purchases or other removals of underlying mortgage loans from the
trust.
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Prepayments and other early liquidations of the underlying mortgage
loans will result in payments on the series ___ certificates of amounts that
would otherwise be paid over the remaining terms of the mortgage loans. This
will tend to shorten the weighted average lives of those series ___ certificates
with principal balances. Defaults on the underlying mortgage loans, particularly
at or near their maturity dates, may result in significant delays in payments of
principal on the mortgage loans and, accordingly, on the series ___
certificates, while work-outs are negotiated or foreclosures are completed.
These delays will tend to lengthen the weighted average lives of those
certificates. See "Servicing of the Underlying Mortgage Loans--Modifications,
Waivers, Amendment and Consent" in this prospectus supplement. In addition, the
ability of a borrower under an ARD Loan, to repay that loan on the related
anticipated repayment date will generally depend on its ability to either
refinance the mortgage loan or sell the corresponding mortgaged real property.
Also, a borrower may have little incentive to repay its mortgage loan on the
related anticipated repayment date if then prevailing interest rates are
relatively high. Accordingly, there can be no assurance that any ARD Loan in the
trust will be paid in full on its anticipated repayment date.
The extent to which the yield to maturity on any offered certificate
may vary from the anticipated yield will depend upon the degree to which the
certificate is purchased at a discount or premium and when, and to what degree,
payments of principal on the underlying mortgage loans are in turn paid or
otherwise result in a reduction of the principal balance or notional amount of
the certificate. If you purchase your offered certificates at a discount, you
should consider the risk that a slower than anticipated rate of principal
payments on the underlying mortgage loans could result in an actual yield to you
that is lower than your anticipated yield. If you purchase class X certificates,
or if you purchase any other offered certificates at a premium, you should
consider the risk that a faster than anticipated rate of principal payments on
the underlying mortgage loans could result in an actual yield to you that is
lower than your anticipated yield.
If you are contemplating an investment in the class X certificates, you
should fully consider the risk that an extremely rapid rate of principal
payments on the underlying mortgage loans could result in your failure to recoup
fully your initial investment.
Because the rate of principal payments on or with respect to the
underlying mortgage loans will depend on future events and a variety of factors,
no assurance can be given as to the rate or the rate of principal prepayments in
particular. We are not aware of any relevant publicly available or authoritative
statistics with respect to the historical prepayment experience of a large group
of real estate loans comparable to those in the mortgage pool.
Even if they are available and payable on your offered certificates,
prepayment premiums and yield maintenance charges may not be sufficient to
offset fully any loss in yield on your offered certificates attributable to the
related prepayments of the underlying mortgage loans.
DELINQUENCIES AND DEFAULTS ON THE MORTGAGE LOANS. The rate and timing
of delinquencies and defaults on the underlying mortgage loans will affect the
amount of payments on your offered certificates, the yield to maturity of your
offered certificates, the rate of principal payments on your offered
certificates and the weighted average life of your offered certificates.
Delinquencies on the
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underlying mortgage loans, unless covered by P&I advances, may result in
shortfalls in payments of interest and/or principal on your offered certificates
for the current month. Although any shortfalls in payments of interest may be
made up on future payment dates, no interest would accrue on those shortfalls.
Thus, any shortfalls in payments of interest would adversely affect the yield to
maturity of your offered certificates.
If--
- you calculate the anticipated yield to maturity for your
offered certificates based on an assumed rate of default and
amount of losses on the underlying mortgage loans that is
lower than the default rate and amount of losses actually
experienced, and
- the additional losses result in a reduction of the total
payments on or the total principal balance or notional amount
of your offered certificates,
then your actual yield to maturity will be lower than you calculated and could,
under some scenarios, be negative.
The timing of any loss on a liquidated mortgage loan that results in a
reduction of the total payments on or the total principal balance or notional
amount of your offered certificates will also affect your actual yield to
maturity, even if the rate of defaults and severity of losses are consistent
with your expectations. In general, the earlier your loss occurs, the greater
the effect on your yield to maturity.
Even if losses on the underlying mortgage loans do not result in a
reduction of the total payments on or the total principal balance or notional
amount of your offered certificates, the losses may still affect the timing of
payments on, and the weighted average life and yield to maturity of, your
offered certificates.
CERTAIN RELEVANT FACTORS. The following factors, among others, will
affect the rate and timing of principal payments and defaults and the severity
of losses on or with respect to the underlying mortgage loans in the trust:
- prevailing interest rates;
- the terms of the mortgage loans, including provisions that
require the payment of prepayment premiums and yield
maintenance charges, provisions that impose prepayment
lock-out periods and amortization terms that require balloon
payments;
- the demographics and relative economic vitality of the areas
in which the mortgaged real properties are located;
- the general supply and demand for commercial and multifamily
rental space of the type available at the mortgaged real
properties in the areas in which the mortgaged real properties
are located;
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- the quality of management of the mortgaged real properties;
- the servicing of the mortgage loans;
- possible changes in tax laws; and
- other opportunities for investment.
See "Risk Factors--Risks Related to the Mortgage Loans", "Description
of the Mortgage Pool" and "Servicing of the Underlying Mortgage Loans" in this
prospectus supplement and "Description of the Governing Documents" and "Yield
and Maturity Considerations--Yield and Prepayment Considerations" in the
accompanying prospectus.
The rate of prepayment on the mortgage loans in the trust is likely to
be affected by prevailing market interest rates for mortgage loans of a
comparable type, term and risk level. When the prevailing market interest rate
is below the annual rate at which a mortgage loan accrues interest, the related
borrower may have an increased incentive to refinance the mortgage loan.
Conversely, to the extent prevailing market interest rates exceed the annual
rate at which a mortgage loan accrues interest, the related borrower may be less
likely to voluntarily prepay the mortgage loan. Assuming prevailing market
interest rates exceed the revised mortgage interest rate at which an ARD Loan
accrues interest following its anticipated repayment date, the primary incentive
for the related borrower to prepay the mortgage loan on or before its
anticipated repayment date is to give the borrower access to excess cash flow,
all of which, net of the minimum required debt service, approved property
expenses and any required reserves, must be applied to pay down principal of the
mortgage loan. Accordingly, there can be no assurance that any ARD Loan in the
trust will be prepaid on or before its anticipated repayment date or on any
other date prior to maturity.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some underlying borrowers may
sell their mortgaged real properties in order to realize their equity in those
properties, to meet cash flow needs or to make other investments. In addition,
some underlying borrowers may be motivated by federal and state tax laws, which
are subject to change, to sell their mortgaged real properties prior to the
exhaustion of tax depreciation benefits.
A number of the underlying borrowers are limited or general
partnerships. The bankruptcy of the general partner in a partnership may result
in the dissolution of the partnership. The dissolution of a borrower
partnership, the winding-up of its affairs and the distribution of its assets
could result in an acceleration of its payment obligations under the related
mortgage loan.
We make no representation or warranty regarding:
- the particular factors that will affect the rate and timing of
prepayments and defaults on the underlying mortgage loans;
- the relative importance of those factors;
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- the percentage of the total principal balance of the
underlying mortgage loans that will be prepaid or as to which
a default will have occurred as of any particular date; or
- the overall rate of prepayment or default on the underlying
mortgage loans.
UNPAID INTEREST. If the portion of the Available P&I Funds payable with
respect to interest on any class of offered certificates on any payment date is
less than the total amount of interest then payable for the class, the shortfall
will be payable to the holders of those certificates on subsequent payment
dates, subject to the Available P&I Funds on those subsequent payment dates and
the priority of payments described under "Description of the Offered
Certificates--Payments--Priority of Payments" in this prospectus supplement.
That shortfall will not bear interest, however, and will therefore negatively
affect the yield to maturity of that class of offered certificates for so long
as it is outstanding.
DELAY IN PAYMENTS. Because monthly payments will not be made on the
certificates until several days after the due dates for the mortgage loans
during the related collection period, your effective yield will be lower than
the yield that would otherwise be produced by your pass-through rate and
purchase price, assuming that purchase price did not account for a delay.
YIELD SENSITIVITY
The tables on Annex C-1 hereto show the pre-tax corporate bond
equivalent or CBE yield to maturity with respect to each class of offered
certificates, and the modified duration, weighted average life, first payment
date on which principal is to be paid and final payment date on which principal
is to be paid with respect to each class of offered certificates, other than the
class X certificates. We prepared those tables using the Modeling Assumptions.
Where applicable, they also show the specified assumed purchase prices, which
prices do not include accrued interest. Assumed purchase prices are expressed in
32nds as a percentage of the initial total principal balance or notional amount
of each class of offered certificates. For example, ___ means __%.
We calculated the yields set forth in the tables on Annex C-1 by--
- determining the monthly discount rates which, when applied to
the assumed stream of cash flows to be paid on each class of
offered certificates, would cause the discounted present value
of that assumed stream of cash flows to equal the assumed
purchase prices, plus accrued interest from and including the
cut-off date to but excluding the assumed settlement date
specified as part of the offered certificates, and
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- converting those monthly rates to semi-annual corporate bond
equivalent rates.
That calculation does not take into account variations that may occur in the
interest rates at which investors may be able to reinvest funds received by them
as payments on the offered certificates and, consequently, does not purport to
reflect the return on any investment in the offered certificates when those
reinvestment rates are considered.
For purposes of the tables on Annex C-1, modified duration has been
calculated using the modified Macaulay Duration as specified in the "PSA
Standard Formulas". The Macaulay Duration is calculated as the present value
weighted average time to receive future payments of principal and interest, and
the PSA Standard Formula modified duration is calculated by dividing the
Macaulay Duration by the appropriate semi-annual compounding factor. The
duration of a security may be calculated according to various methodologies.
Accordingly, no representation is made by us or any other person that the
modified duration approach used in this prospectus supplement is appropriate.
Duration, like yield, will be affected by the prepayment rate of the underlying
mortgage loans and extensions with respect to balloon payments that actually
occur during the life of the class A-1, class A-2, class B, class C, class D,
class E and class F certificates and by the actual performance of the underlying
mortgage loans, all of which may differ, and may differ significantly, from the
assumptions used in preparing the yield tables.
Prepayments on mortgage loans may be measured by a prepayment standard
or model. The model used in this prospectus supplement is the Constant
Prepayment Rate or CPR model. The CPR model represents an assumed constant
annual rate of prepayment each month, expressed as a per annum percentage of the
then outstanding principal balance of the subject mortgage loan(s).
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The characteristics of the mortgage loans in the trust will differ in
some respects from those assumed in preparing the tables on Annex C-1. Those
tables are presented for illustrative purposes only. Thus, neither the mortgage
pool nor any pooled mortgage loan will prepay at any constant rate, and it is
unlikely that the pooled mortgage loans will prepay in a manner consistent with
any designated scenario for the tables on Annex C-1. In addition, there can be
no assurance that--
- the pooled mortgage loans will prepay at any particular rate,
- the pooled mortgage loans will not prepay, involuntarily or
otherwise, during lockout periods, yield maintenance periods
and/or declining premium periods,
- the ARD Loans in the trust will be paid in full on their
respective anticipated repayment dates,
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- the actual pre-tax yields on, or any other payment
characteristics of, any class of offered certificates will
correspond to any of the information shown in the tables on
Annex C-1, or
- the total purchase prices of the offered certificates will be
as assumed.
You must make your own decision as to the appropriate assumptions,
including prepayment assumptions, to be used in deciding whether to purchase the
offered certificates.
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
The weighted average life of any offered certificate, other than a
class X certificate, refers to the average amount of time that will elapse from
the date of its issuance until each dollar to be applied in reduction of the
principal balance of that certificate is distributed to the investor. For
purposes of this prospectus supplement, the weighted average life of any offered
certificate, other than a class X certificate, is determined as follows:
- multiply the amount of each principal payment on the
certificate by the number of years from the assumed settlement
date to the related payment date;
- sum the results; and
- divide the sum by the total amount of the reductions in the
principal balance of the certificate.
Accordingly, the weighted average life of any offered certificate, other than a
class X certificate, will be influenced by, among other things, the rate at
which principal of the underlying mortgage loans is paid or otherwise collected
or advanced and the extent to which those payments, collections and/or advances
of principal are in turn applied in reduction of the principal balance of the
class of principal to which the certificate belongs.
As described in this prospectus supplement, the principal payment
amount for each payment date will be payable first with respect to the class A-1
and/or class A-2 certificates until the total principal balances of those
classes are reduced to zero, and will thereafter be distributable entirely with
respect to the other classes of certificates with principal balances,
sequentially based upon their relative seniority, in each case until the related
principal balance is reduced to zero. As a consequence of the foregoing, the
weighted average lives of the class A-1 and class A-2 certificates may be
shorter, and the weighted average lives of the other classes of certificates
with principal balances may be longer, than would otherwise be the case
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if the principal payment amount for each payment date was being paid on a PRO
RATA basis among the respective classes of certificates with principal balances.
The tables set forth in Annex C-2 show with respect to each class of
offered certificates, other than the class X certificates--
- the weighted average life of that class, and
- the percentage of the initial total principal balance of that
class that would be outstanding after each of the specified
dates,
based upon each of the indicated levels of CPR and the Modeling Assumptions.
We make no representation that--
- the mortgage loans in the trust will prepay in accordance with
the assumptions set forth in this prospectus supplement at any
of the CPRs shown or at any other particular prepayment rate,
- all the mortgage loans in the trust will prepay in accordance
with the assumptions set forth in this prospectus supplement
at the same rate, or
- mortgage loans in the trust that are in a lockout period, a
yield maintenance period or declining premium period will not
prepay as a result of involuntary liquidations upon default or
otherwise.
USE OF PROCEEDS
Substantially all of the proceeds from the sale of the offered
certificates will be used by us to purchase the mortgage loans that we will
include in the trust and to pay those expenses incurred in connection with the
issuance of the series ____ certificates.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
Upon the issuance of the offered certificates, ___________________, our
counsel, will deliver its opinion generally to the effect that, assuming
compliance with the pooling and servicing agreement, and subject to any other
assumptions set forth in the opinion, REMIC I, REMIC II and REMIC III,
respectively, will each qualify as a REMIC under the Internal Revenue Code of
1986.
The assets of REMIC I will generally include--
- the pooled mortgage loans,
- any REO Properties acquired on behalf of the series ___
certificateholders,
- the master servicer's custodial account,
- the special servicer's REO account, and
- the trustee's collection account and interest reserve account,
but will exclude any collections of Post-ARD Additional Interest on the ARD
Loans.
For federal income tax purposes,
- the separate non-certificated regular interests in REMIC I
will be the regular interests in REMIC I and will be the
assets of REMIC II,
- the class R-I certificates will evidence the sole class of
residual interests in REMIC I,
- the separate non-certificated regular interests in REMIC II
will be the regular interests in REMIC II and will be the
assets of REMIC III,
- the class R-II certificates will evidence the sole class of
residual interests in REMIC II,
- the class A-1, A-2, X, B, C, D, E, F, G, H, J, K, L, M and N
certificates will evidence the regular interests in, and will
generally be treated as debt obligations of, REMIC III, and
- the class R-III certificates will evidence the sole class of
residual interests in REMIC III.
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DISCOUNT AND PREMIUM; PREPAYMENT CONSIDERATION
For federal income tax reporting purposes, it is anticipated that the
class _____ and class _____ certificates will be issued with more than a DE
MINIMIS amount of original issue discount. The class _____ certificates will be
issued with a DE MINIMIS amount of original issue discount. The other classes of
offered certificates will not be issued with original issue discount. When
determining the rate of accrual of market discount and premium, if any, for
federal income tax purposes the prepayment assumption used will be that
subsequent to the date of any determination:
- [the ARD Loans in the trust will be paid in full on their
respective anticipated repayment dates,]
- no mortgage loan in the trust will otherwise be prepaid prior
to maturity, and
- there will be no extension of maturity for any mortgage loan
in the trust.
However, no representation is made as to the actual rate at which the pooled
mortgage loans will prepay, if at all. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates" in the
accompanying prospectus.
The IRS has issued regulations under Sections 1271 to 1275 of the
Internal Revenue Code of 1986 generally addressing the treatment of debt
instruments issued with original issue discount. You should be aware, however,
that those regulations and Section 1272(a)(6) of the Internal Revenue Code of
1986 do not adequately address all issues relevant to, or are not applicable to,
prepayable securities such as the offered certificates. We recommend that you
consult with your own tax advisor concerning the tax treatment of your offered
certificates.
If the method for computing original issue discount described in the
accompanying prospectus results in a negative amount for any period with respect
to any holder of offered certificates, the amount of original issue discount
allocable to that period would be zero. This is a possibility of particular
relevance to a holder of a class X certificate. The holder would be permitted to
offset the negative amount only against future original issue discount, if any,
attributable to his or her certificates. Although the matter is not free from
doubt, a holder of a class X certificate may be permitted to deduct a loss to
the extent that his or her respective remaining basis in the certificate exceeds
the maximum amount of future payments to which the holder is entitled, assuming
no further prepayments of the underlying mortgage loans. Any loss might be
treated as a capital loss.
Some classes of the offered certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
these classes of offered certificates will be treated as holding a certificate
with amortizable bond premium will depend on the certificateholder's purchase
price and the payments remaining to be made on the certificate at the time of
its acquisition by the certificateholder. If you acquire an interest in any
class of offered certificates issued at a premium, you should consider
consulting your own tax advisor regarding the possibility of making an election
to amortize the premium. See "Federal Income Tax Consequences--REMICs--Taxation
of Owners of REMIC Regular Certificates--Premium" in the accompanying
prospectus.
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Prepayment premiums and yield maintenance charges actually collected on
the underlying mortgage loans will be paid on the offered certificates as and to
the extent described in this prospectus supplement. It is not entirely clear
under the Code when the amount of a prepayment premium or yield maintenance
charge should be taxed to the holder of a class of offered certificates entitled
to that amount. For federal income tax reporting purposes, the tax administrator
will report prepayment premiums or yield maintenance charges as income to the
holders of a class of offered certificates entitled thereto only after the
master servicer's actual receipt of those amounts. The IRS may nevertheless seek
to require that an assumed amount of prepayment premiums and yield maintenance
charges be included in payments projected to be made on the offered certificates
and that taxable income be reported based on the projected constant yield to
maturity of the offered certificates. Therefore, the projected prepayment
premiums and yield maintenance charges would be included prior to their actual
receipt by holders of the offered certificates. If the projected prepayment
premiums and yield maintenance charges were not actually received, presumably
the holder of an offered certificate would be allowed to claim a deduction or
reduction in gross income at the time the unpaid prepayment premiums and yield
maintenance charges had been projected to be received. Moreover, it appears that
prepayment premiums and yield maintenance charges are to be treated as ordinary
income rather than capital gain. The correct characterization of the income is
not entirely clear. We recommend you consult your own tax advisors concerning
the treatment of prepayment premiums and yield maintenance charges.
CONSTRUCTIVE SALES OF CLASS X CERTIFICATES
The Taxpayer Relief Act of 1997 added a provision to the Internal
Revenue Code of 1986 that requires the recognition of gain upon the constructive
sale of an appreciated financial position. A constructive sale of a financial
position may occur if a taxpayer enters into a transaction or series of
transactions that have the effect of substantially eliminating the taxpayer's
risk of loss and opportunity for gain with respect to the financial instrument.
Debt instruments that:
- entitle the holder to a specified principal amount,
- pay interest at a fixed or variable rate, and
- are not convertible into the stock of the issuer or a related party,
cannot be the subject of a constructive sale for this purpose. Accordingly, only
class X certificates, which do not have principal balances, could be subject to
this provision and only if a holder of those certificates engages in a
constructive sale transaction.
CHARACTERIZATION OF INVESTMENTS IN OFFERED CERTIFICATES
Except to the extent noted below, the offered certificates will be
"real estate assets" within the meaning of Section 856(c)(5)(B) of the Internal
Revenue Code of 1986 in the same proportion that the assets of the trust would
be so treated. In addition, interest, including original issue discount, if any,
on the offered certificates will be interest described in Section 856(c)(3)(B)
of the Internal Revenue Code
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of 1986 to the extent that those certificates are treated as "real estate
assets" within the meaning of Section 856(c)(5)(B) of the Internal Revenue Code
of 1986.
Most of the mortgage loans to be included in the trust are not secured
by real estate used for residential or other purposes prescribed in Section
7701(a)(19)(C) of the Internal Revenue Code of 1986. Consequently, the offered
certificates will be treated as assets qualifying under that section to only a
limited extent. Accordingly, investment in the offered certificates may not be
suitable for a thrift institution seeking to be treated as a "domestic building
and loan association" under Section 7701(a)(19)(C) of the Internal Revenue Code
of 1986. The offered certificates will be treated as "qualified mortgages" for
another REMIC under Section 860G(a)(3)(C) of the Internal Revenue Code of 1986
and "permitted assets" for a "financial asset securitization investment trust"
under Section 860L(c) of the Internal Revenue Code of 1986.
To the extent an offered certificate represents ownership of an
interest in a mortgage loan that is secured in part by the related borrower's
interest in a bank account, that mortgage loan is not secured solely by real
estate. Therefore:
- a portion of that certificate may not represent ownership of
"loans secured by an interest in real property" or other
assets described in Section 7701(a)(19)(C) of the Internal
Revenue Code of 1986;
- a portion of that certificate may not represent ownership of
"real estate assets" under Section 856(c)(5)(B) of the
Internal Revenue Code of 1986; and
- the interest on that certificate may not constitute "interest
on obligations secured by mortgages on real property" within
the meaning of Section 856(c)(3)(B) of the Internal Revenue
Code of 1986.
See "Description of the Mortgage Pool" in this prospectus supplement and
"Federal Income Tax Consequences--REMICs--Characterization of Investments in
REMIC Certificates" in the accompanying prospectus.
For further information regarding the federal income tax consequences
of investing in the offered certificates, see "Federal Income Tax
Consequences--REMICs" in the accompanying prospectus.
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended and the
Internal Revenue Code of 1986 impose various requirements on--
- ERISA Plans, and
- persons that are fiduciaries with respect to ERISA Plans,
in connection with the investment of the assets of an ERISA Plan. For purposes
of this discussion, ERISA Plans may include individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts,
including as applicable, insurance company general accounts, in which other
ERISA Plans are invested.
A fiduciary of any ERISA Plan should carefully review with its legal
advisors whether the purchase or holding of offered certificates could be or
give rise to a transaction that is prohibited or is not otherwise permitted
either under ERISA or Section 4975 of the Internal Revenue Code of 1986 or
whether there exists any statutory or administrative exemption applicable
thereto. Some fiduciary and prohibited transaction issues arise only if the
assets of the trust are "plan assets" for purposes of Part 4 of Title I of ERISA
and Section 4975 of the Internal Revenue Code of 1986. Whether the assets of the
trust will be plan assets at any time will depend on a number of factors,
including the portion of any class of certificates that is held by benefit plan
investors within the meaning of U.S. Department of Labor Regulation Section
2510.3-101.
The U.S. Department of Labor has issued an individual prohibited
transaction exemption to the underwriter, identified as Prohibited Transaction
Exemption 91-14. Subject to the satisfaction of conditions set forth in PTE
91-14, PTE 91-14 generally exempts from the application of the prohibited
transaction provisions of Sections 406(a) and (b) and 407(a) of ERISA, and the
excise taxes imposed on these prohibited transactions under Sections 4975(a) and
(b) of the Internal Revenue Code of 1986, specified transactions relating to,
among other things, the servicing and operation of pools of real estate loans,
such as the mortgage pool, and the purchase, sale and holding of mortgage
pass-through certificates, such as the class A-1, A-2 and X certificates, that
are underwritten by an Exemption-Favored Party.
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PTE 91-14 sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of a class A-1, A-2 or X
certificate to be eligible for exemptive relief under that exemption. The
conditions are as follows:
- FIRST, the acquisition of the certificate by a plan must be on
terms that are at least as favorable to the ERISA Plan as they
would be in an arm's-length transaction with an unrelated
party;
- SECOND, the rights and interests evidenced by that certificate
must not be subordinated to the rights and interests evidenced
by the other certificates;
- THIRD, at the time of its acquisition by the plan, that
certificate must be rated in one of the three highest generic
rating categories by Moody's, Fitch, Standard & Poor's or Duff
& Phelps;
- FOURTH, the trustee cannot be an affiliate of any other member
of the restricted group, which consists of--
1. the trustee,
2. the Exemption-Favored Parties,
3. us,
4. the master servicer,
5. the special servicer,
6. any sub-servicers,
7. the mortgage loan sellers,
8. each borrower, if any, with respect to mortgage loans
constituting more than 5.0% of the total unamortized
principal balance of the mortgage pool as of the date
of initial issuance of the offered certificates, and
9. any and all affiliates of any of the aforementioned
persons;
- FIFTH, the following must be true--
1. the sum of all payments made to and retained by
Exemption-Favored Parties must represent not more
than reasonable compensation for underwriting the
relevant class of certificates,
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2. the sum of all payments made to and retained by us in
connection with the assignment of mortgage loans to
the trust must represent not more than the fair
market value of the obligations, and
3. the sum of all payments made to and retained by the
master servicer, the special servicer and any
sub-servicer must represent not more than reasonable
compensation for that person's services under the
pooling and servicing agreement and reimbursement of
that person's reasonable expenses in connection
therewith; and
- SIXTH, the investing ERISA Plan must be an accredited
investor as defined in Rule 501(a)(1) of Regulation D under
the Securities Act of 1933, as amended.
Because the class A-1, A-2 and X certificates are not subordinated to
any other class of certificates, the second general condition set forth above is
satisfied with respect to the class A-1, A-2 and X certificates. It is a
condition of their issuance that the class A-1, A-2 and X certificates be rated
not lower than "_____" by _____________ and "_____" by ______________. In
addition, the initial trustee is not an affiliate of any other member of the
restricted group. Accordingly, as of the date of initial issuance of the
certificates, the third and fourth general conditions set forth above will be
satisfied with respect to the class A-1, A-2 and X certificates. A fiduciary of
an ERISA Plan contemplating the purchase of a class A-1, A-2 or X certificate in
the secondary market must make its own determination that, at the time of the
purchase, the certificate continues to satisfy the third and fourth general
conditions set forth above. A fiduciary of an ERISA Plan contemplating the
purchase of a class A-1, A-2 or X certificate, whether in the initial issuance
of the certificate or in the secondary market, must make its own determination
that the first and fifth general conditions set forth above will be satisfied
with respect to the certificate as of the date of the purchase. An ERISA Plan's
authorizing fiduciary will be deemed to make a representation regarding
satisfaction of the sixth general condition set forth above in connection with
the purchase of a class A-1, A-2 or X certificate.
PTE 91-14 also requires that the trust meet the following requirements:
- the trust assets must consist solely of assets of the type
that have been included in other investment pools;
- certificates evidencing interests in those other investment
pools must have been rated in one of the three highest generic
categories of Moody's, Fitch, Standard & Poor's or Duff &
Phelps for at least one year prior to the ERISA Plan's
acquisition of a class A-1, A-2 or X certificate; and
- certificates evidencing interests in those other investment
pools must have been purchased by investors other than ERISA
Plans for at least one year prior to any ERISA Plan's
acquisition of a class A-1, A-2 or X certificate.
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We believe that these requirements have been satisfied as of the date
of this prospectus supplement.
If the general conditions of PTE 91-14 are satisfied, PTE 91-14 may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA, as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Internal Revenue Code of 1986 by reason of Sections 4975(c)(1)(A) through (D) of
the Internal Revenue Code of 1986, in connection with--
- the direct or indirect sale, exchange or transfer of class
A-1, A-2 or X certificates acquired by an ERISA Plan upon
initial issuance from us or an Exemption-Favored Party when we
are, or either mortgage loan seller, the trustee, the master
servicer, the special servicer or any sub-servicer, provider
of credit support, Exemption-Favored Party or mortgagor is, a
Party in Interest with respect to the investing ERISA Plan,
- the direct or indirect acquisition or disposition in the
secondary market of class A-1, A-2 or X certificates by an
ERISA Plan, and
- the continued holding of class A-1, A-2 or X certificates by
an ERISA Plan.
However, no exemption is provided from the restrictions of Sections
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of a
class A-1, A-2 or X certificate that is--
1. on behalf of an ERISA Plan sponsored by any member of the
restricted group, and
2. by any person who has discretionary authority or renders
investment advice with respect to the assets of that ERISA
Plan.
Moreover, if the general conditions of PTE 91-14, as well as other
conditions set forth in PTE 91-14, are satisfied, PTE 91-14 may also provide an
exemption from the restrictions imposed by Sections 406(b)(1) and (b)(2) of
ERISA and the taxes imposed by Section 4975(c)(1)(E) of the Internal Revenue
Code of 1986 in connection with:
- the direct or indirect sale, exchange or transfer of class
A-1, A-2 or X certificates in the initial issuance of those
certificates between us or an Exemption-Favored Party and an
ERISA Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of
the assets of the ERISA Plan in those certificates is--
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1. a borrower with respect to 5.0% or less of the fair
market value of the underlying mortgage loans, or
2. an affiliate of this person;
- the direct or indirect acquisition or disposition in the
secondary market of class A-1, A-2 or X certificates by an
ERISA Plan; and
- the continued holding of class A-1, A-2 or X certificates by
an ERISA Plan.
Further, if the general conditions of PTE 91-14, as well as other
conditions set forth in PTE 91-14, are satisfied, PTE 91-14 may provide an
exemption from the restrictions imposed by Sections 406(a), 406(b) and 407(a) of
ERISA, and the taxes imposed by Sections 4975(a) and (b) of the Internal Revenue
Code of 1986 by reason of Section 4975(c) of the Internal Revenue Code of 1986,
for transactions in connection with the servicing, management and operation of
the trust assets.
Lastly, if the general conditions of PTE 91-14 are satisfied, PTE 91-14
also may provide an exemption from the restrictions imposed by Sections 406(a)
and 407(a) of ERISA, and the taxes imposed by Section 4975(a) and (b) of the
Internal Revenue Code of 1986, by reason of Sections 4975(c)(1)(A) through (D)
of the Internal Revenue Code of 1986, if the restrictions are deemed to
otherwise apply merely because a person is deemed to be a Party in Interest with
respect to an investing plan by virtue of--
- providing services to the ERISA Plan, or
- having a specified relationship to this person,
solely as a result of the ERISA Plan's ownership of class A-1, A-2 or X
certificates.
Before purchasing a class A-1, A-2 or X certificate, a fiduciary of an
ERISA Plan should itself confirm that:
- the class A-1, A-2 and X certificates are "certificates" for
purposes of PTE 91-14, and
- the general and other conditions set forth in PTE 91-14 and
the other requirements set forth in PTE 91-14 would be
satisfied at the time of the purchase.
In addition to determining the availability of the exemptive relief
provided in PTE 91-14, a fiduciary of an ERISA Plan considering an investment in
class A-1, A-2 or X certificates should consider the availability of any other
prohibited transaction class exemptions. See "ERISA Considerations" in the
accompanying prospectus. There can be no assurance that any exemption described
in the accompanying prospectus will apply with respect to any particular
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investment by an ERISA Plan in class A-1, A-2 or X certificates or, even if it
were deemed to apply, that it would apply to all prohibited transactions that
may occur in connection with the investment. A purchaser of class A-1, A-2 or X
certificates should be aware, however, that even if the conditions specified in
one or more class exemptions are satisfied, the scope of relief provided by a
class exemption may not cover all acts which might be construed as prohibited
transactions.
The characteristics of the class B, C, D, E and F certificates do not
meet the requirements of PTE 91-14. Accordingly, those offered certificates may
not be acquired by, on behalf of or with the assets of an ERISA Plan, except in
the case of an insurance company using funds in its general account, which may
be able to rely on Section III of Prohibited Transaction Class Exemption 95-60,
which we discuss below.
So long as the applicable conditions are satisfied, Section III of PTCE
95-60 exempts from the application of the prohibited transaction provisions of
Sections 406(a), 406(b) and 407(a) of ERISA and Section 4975 of the Internal
Revenue Code of 1986 transactions in connection with the servicing, management
and operation of the trust under circumstances where an insurance company
general account has an interest in the trust as a result of its acquisition of
series ___ certificates. If these conditions are met, insurance company general
accounts would be allowed to purchase the classes of offered certificates, such
as the class B, C, D, E and F certificates, that do not meet requirements of PTE
91-14 solely because they--
- are subordinated to other classes of the certificates or
- have not received a rating at the time of the purchase in one
of the three highest rating categories from [Moody's, Fitch,
Standard & Poor's or Duff & Phelps].
All other conditions of PTE 91-14 would have to be satisfied in order for PTCE
95-60 to be available. Before purchasing any class B, C, D, E or F certificates,
an insurance company general account seeking to rely on Section III of PTCE
95-60 should itself confirm that all applicable conditions and other
requirements have been satisfied.
A governmental plan as defined in Section 3(32) of ERISA is not subject
to Title I of ERISA or Section 4975 of the Internal Revenue Code of 1986.
However, a governmental plan may be subject to a federal, state or local law
which is, to a material extent, similar to the foregoing provisions of ERISA or
the Internal Revenue Code of 1986. A fiduciary of a governmental plan should
make its own determination as to the need for and the availability of any
exemptive relief under any similar law.
Any fiduciary of an ERISA Plan considering whether to purchase an
offered certificate on behalf of that ERISA Plan should consult with its counsel
regarding the applicability of the fiduciary responsibility and prohibited
transaction provisions of ERISA and the Internal Revenue Code of 1986 to the
investment.
The sale of offered certificates to an ERISA Plan is in no way a
representation or warranty by us or the underwriter that the investment meets
all relevant legal requirements with respect to investments
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by ERISA Plans generally or by any particular ERISA Plan, or that the investment
is appropriate for ERISA Plans generally or for any particular ERISA Plan.
LEGAL INVESTMENT
[Upon issuance, the class A-1, A-2, B and X certificates will
constitute mortgage related securities for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as amended. However, in order to remain
mortgage related securities, the class A-1, A-2, B and X certificates must,
among other things, continue to be rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization. In addition, the class A-1, A-2, B and X certificates will
constitute mortgage related securities in part because they evidence interest
in notes secured by first mortgage liens on one or more real properties upon
which is located a residential, commercial or mixed residential and commercial
structure.
The remaining offered certificates will NOT be mortgage related
securities for purposes of SMMEA. As a result, the appropriate characterization
of these remaining certificates under various legal investment restrictions, and
thus the ability of investors subject to these restrictions to purchase those
certificates, is subject to significant interpretive uncertainties.]
Neither we nor the underwriter makes any representation as to the
ability of particular investors to purchase the offered certificates under
applicable legal investment or other restrictions. 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--
- are legal investments for them, or
- are subject to investment, capital or other restrictions.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, prudent investor provisions, percentage-of-assets limits 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 investors, including
depository institutions, either to purchase offered certificates or to purchase
offered certificates representing more
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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 are legal investments for the investors.
See "Legal Investment" in the accompanying prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement dated
_____________ between us and the underwriter, the underwriter has agreed to
purchase from us and we have agreed to sell to the underwriter _____% of each
class of the offered certificates. It is expected that delivery of the offered
certificates will be made to the underwriter in book-entry form through the same
day funds settlement system of DTC on or about ______________ against payment
therefor in immediately available funds.
The underwriting agreement provides that the obligation of the
underwriter to pay for and accept delivery of the offered certificates is
subject to, among other things:
- the receipt of various legal opinions; and
- the satisfaction of various conditions, including that--
1. no stop order suspending the effectiveness of our
registration statement shall be in effect, and
2. no proceedings for the purpose of obtaining a stop
order shall be pending before or threatened by the
SEC.
The distribution of the offered certificates by the underwriter may be
accomplished 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
us from the sale of the offered certificates, before deducting expenses payable
by us, will be approximately ____% of the total principal balance of the offered
certificates, plus accrued interest on all the offered certificates from
_______________. The underwriter may accomplish the transactions by selling the
offered certificates to or through dealers, and the dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the underwriter. The underwriter may be deemed to have received
compensation from us, in connection with the sale of the offered certificates,
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 statutory 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.
The underwriting agreement provides that we will indemnify the
underwriter, and that under limited circumstances the underwriter will indemnify
us, against various civil liabilities under the Securities Act of 1933, as
amended, relating to the disclosure in this prospectus supplement, the
accompanying prospectus or our registration statement.
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We have also been advised by the underwriter that it presently intends
to make a market in the offered certificates. The underwriter has no obligation
to do so, however, and any market making may be discontinued at any time. There
can be no assurance that an active public market for the offered certificates
will develop. See "Risk Factors--Risks Related to the Offered Certificates--Many
Factors, Including Lack of Liquidity, Can Adversely Affect the Market Value of
Your Offered Certificates" in this prospectus supplement and "Risk Factors--Lack
of Liquidity Will Impair Your Ability to Sell Your Offered Certificates and May
Have an Adverse Effect on the Market Value of Your Offered Certificates" in the
accompanying prospectus.
LEGAL MATTERS
Particular legal matters relating to the certificates will be passed
upon for us and the underwriter by ___________________, New York, New York.
RATINGS
It is a condition to their issuance that the respective classes of
offered certificates be rated as follows:
<TABLE>
<CAPTION>
CLASS [RATING AGENCY] [RATING AGENCY]
<S> <C> <C>
Class A-1
Class A-2
Class B
Class C
Class D
Class E
Class F
Class X
</TABLE>
The ratings on the offered certificates address the likelihood of the
timely receipt by their holders of all payments of interest to which they are
entitled on each payment date and, except in the case of the class X
certificates, the ultimate receipt by their holders of all payments of principal
to which they are entitled on or before the rated final payment date. The
ratings take into consideration the credit quality of the mortgage pool,
structural and legal aspects associated with the offered certificates, and the
extent to which the payment stream from the mortgage pool is adequate to make
payments of interest and/or principal required under the offered certificates.
The ratings on the respective classes of offered certificates do not
represent any assessment of--
- the tax attributes of the offered certificates or of the
trust,
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- whether or to what extent prepayments of principal may be
received on the underlying mortgage loans,
- the likelihood or frequency of prepayments of principal on the
underlying mortgage loans,
- the degree to which the amount or frequency of prepayments of
principal on the underlying mortgage loans might differ from
those originally anticipated,
- whether or to what extent the interest payable on any class of
offered certificates may be reduced in connection with Net
Aggregate Prepayment Interest Shortfalls, and
- whether and to what extent prepayment premiums, yield
maintenance charges, Default Interest or Post-ARD Additional
Interest will be received.
Also, a security rating does not represent any assessment of the yield
to maturity that investors may experience or the possibility that the class X
certificateholders might not fully recover their investment in the event of
rapid prepayments and/or other liquidations of the mortgage loans.
In general, the ratings address credit risk and not prepayment risk. As
described in this prospectus supplement, the amounts payable with respect to the
class X certificates consist primarily of interest. Even if the entire mortgage
pool were to prepay in the initial month, with the result that the class X
certificateholders receive only a single month's interest payment and,
accordingly, suffer a nearly complete loss of their investment, all amounts due
to those certificateholders will nevertheless have been paid. This result would
be consistent with the respective ratings received on the class X certificates.
The total notional amount of the class X certificates is subject to reduction in
connection with each reduction in the total principal balance of any other
interest-bearing class of series ___ certificates, whether as a result of
payments of principal or in connection with Realized Losses and Additional Trust
Fund Expenses. The ratings of the class X certificates do not address the timing
or magnitude of reduction of the total notional amount of those certificates,
but only the obligation to pay interest timely on that total notional amount as
so reduced from time to time.
There can be no assurance as to whether any rating agency not requested
to rate the offered certificates will nonetheless issue a rating to any class of
offered certificates and, if so, what the rating would be. A rating assigned to
any class of offered certificates by a rating agency that has not been requested
by us to do so may be lower than the rating assigned thereto by ___________ or
____________.
The ratings on the offered certificates should be evaluated
independently from similar ratings on other types of securities. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. See "Rating" in the accompanying prospectus.
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GLOSSARY
The following capitalized terms will have the respective meanings
assigned to them in this "Glossary" section whenever they are used in this
prospectus supplement, including in any of the annexes to this prospectus
supplement.
"ADDITIONAL TRUST FUND EXPENSE" means an expense of the trust that
- arises out of a default on a mortgage loan or an otherwise
unanticipated event, and
- is not covered by a servicing advance or a corresponding
collection from the related borrower.
"ARD LOAN" means any mortgage loan in the trust having the
characteristics described in the first paragraph under "Description of the
Mortgage Pool--Terms and Conditions of the Underlying Mortgage Loans--ARD
Loan" in this prospectus supplement.
"APPRAISAL REDUCTION AMOUNT" means, for any mortgage loan in the trust
as to which an Appraisal Trigger Event has occurred, an amount that:
- will be determined shortly following the later of the date on
which the relevant appraisal or other valuation is obtained or
performed and the date on which the relevant Appraisal Trigger
Event occurred, and
- will equal the excess, if any, of "x" over "y" where--
1. "x" is equal to the sum of:
- the unpaid principal balance of the mortgage
loan, net of any related unreimbursed
advances of principal;
- to the extent not previously advanced by or
on behalf of the master servicer or the
trustee, all unpaid interest, other than any
Default Interest and Post-ARD Additional
Interest, accrued on the mortgage loan
through the most recent due date prior to
the date of determination;
- all accrued but unpaid special servicing
fees with respect to the mortgage loan;
- all related unreimbursed advances made by or
on behalf of the master servicer, the
special servicer or the trustee with respect
to the required appraisal loan, together
with interest on those advances; and
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- all currently due and unpaid real estate
taxes and assessments, insurance premiums
and, if applicable, ground rents with
respect to the related mortgaged real
property, net of any escrow reserves held by
the master servicer or the special servicer
which covers the particular item and other
related reserves; and
2. "y" is equal to 90% of the resulting appraised or
estimated value of the related mortgaged real
property or REO Property, as the appraised or
estimated value may be reduced, to not less than
zero, by the amount of any obligations secured by
liens on the property that are prior to the lien of
the mortgage loan.
If, however, the appraisal or other valuation referred to in the first
bullet point of this definition is not obtained or performed within __ days of
the Appraisal Trigger Event referred to in the first bullet point of this
definition, and no comparable appraisal or other valuation had been obtained or
performed during the ______-month period prior to that Appraisal Trigger Event,
then until the required appraisal or other valuation is obtained or performed,
the Appraisal Reduction Amount for the subject mortgage loan will equal
approximately ____% of the unpaid principal balance of that mortgage loan, net
of any related unreimbursed advances of principal. After receipt of the required
appraisal or other valuation, the special servicer will determine the Appraisal
Reduction Amount, if any, for the subject mortgage loan as described in the
first sentence of this definition.
"APPRAISAL TRIGGER EVENT" means, with respect to any mortgage loan in
the trust, any of the following events:
- the mortgage loan has been modified by the special servicer in
a manner that--
1. affects the amount or timing of any monthly debt
service payment due on it, other than, or in addition
to, bringing current monthly debt service payments
with respect to the mortgage loan,
2. except as expressly contemplated by the related loan
documents, results in a release of the lien of the
mortgage on any material portion of the related
mortgaged real property without a corresponding
principal prepayment in an amount not less than the
fair market value, as is, of the property to be
released, or
3. in the judgment of the special servicer, otherwise
materially impairs the security for the mortgage loan
or reduces the likelihood of timely payment of
amounts due on the mortgage loan;
- the related borrower fails to make any monthly debt service
payment with respect to the mortgage loan and the failure
continues for _____ days;
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- a receiver is appointed and continues in that capacity with
respect to the mortgaged real property securing the mortgage
loan;
- the related borrower becomes the subject of bankruptcy,
insolvency or similar proceedings; or
- the mortgaged real property securing the mortgage loan becomes
an REO Property.
"AVAILABLE P&I FUNDS" means, with respect to any payment date, all
funds available in the trustee's collection account to pay principal and
interest on the series ___ certificates on that payment date.
"CPR" means an assumed constant rate of prepayment each month, which
is expressed on a per annum basis, relative to the then outstanding principal
balance of a pool of mortgage loans for the life of those loans.
"DEFAULT INTEREST" means any interest that--
- accrues on a defaulted mortgage loan solely by reason of the
subject default, and
- is in excess of all interest at the related mortgage interest
rate and any Post-ARD Additional Interest accrued on the
mortgage loan.
"ERISA PLAN" means any employee benefit plan, or other retirement plan,
arrangement or account, that is subject to the fiduciary responsibility
provisions of ERISA and Section 4975 of the Internal Revenue Code of 1986.
"EXEMPTION-FAVORED PARTY" means any of--
- the underwriter,
- any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common
control with the underwriter, and
- any member of the underwriting syndicate or selling group of
which a person described in the prior two bullet points is a
manager or co-manager with respect to those mortgage
pass-through certificates.
"IRS" means the Internal Revenue Service.
"MODELING ASSUMPTIONS" means, collectively, the following assumptions
regarding the series ___ certificates and the mortgage loans in the trust:
- the mortgage loans have the characteristics set forth on Annex
A-1 and the initial mortgage pool balance is approximately
$______________;
- the initial total principal balance or notional amount, as the
case may be, of each class of series ___ certificates is as
described in this prospectus supplement;
- the pass-through rate for each class of series ___
certificates is as described in this prospectus supplement.
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- there are no delinquencies or losses with respect to the
mortgage loans;
- there are no modifications, extensions, waivers or amendments
affecting the monthly debt service payments by borrowers on
the mortgage loans;
- there are no Appraisal Reduction Amounts with respect to the
mortgage loans;
- there are no casualties or condemnations affecting the
corresponding mortgaged real properties;
- each of the mortgage loans provides monthly debt service
payments to be due on the __ day of each month and accrues
interest on the respective basis described in this prospectus
supplement, which is either a 30/360 basis or an actual/360
basis;
- all prepayments on the mortgage loans are assumed to be
accompanied by a full month's interest;
- there are no breaches of our representations and warranties
regarding the mortgage loans;
- monthly debt service payments on the mortgage loans are timely
received on the ___ day of each month;
- no voluntary or involuntary prepayments are received as to any
mortgage loan during that mortgage loan's lockout period,
yield maintenance period or declining premium period, in each
case if any;
- each ARD Loan is paid in full on its anticipated repayment
date;
- except as otherwise assumed in the immediately preceding two
bullet points, prepayments are made on each of the mortgage
loans at the indicated CPRs set forth in the subject tables,
without regard to any limitations in those mortgage loans on
partial voluntary principal prepayments;
- no person or entity entitled thereto exercises its right of
optional termination described in this prospectus supplement
under "Description of the Offered Certificates--Termination";
- no mortgage loan is required to be repurchased by us;
- no prepayment premiums or yield maintenance charges are
collected;
- there are no Additional Trust Fund Expenses;
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- payments on the offered certificates are made on the _____ day
of each month, commencing in _____________; and
- the offered certificates are settled on ________________ .
"NET AGGREGATE PREPAYMENT INTEREST SHORTFALL" means, with respect to
any payment date, the excess, if any, of--
- the Prepayment Interest Shortfalls incurred with respect to
the mortgage pool during the related collection period, over
- the total payments made by the master servicer to cover those
Prepayment Interest Shortfalls.
"PARTY IN INTEREST" means any person that is a "party in interest"
within the meaning of ERISA or a "disqualified person" within the meaning of the
Internal Revenue Code of 1986.
"PERMITTED ENCUMBRANCES" means, with respect to any mortgaged real
property securing a mortgage loan in the trust, any and all of the following:
- the lien of current real property taxes, ground rents, water
charges, sewer rents and assessments not yet due and payable,
- covenants, conditions and restrictions, rights of way,
easements and other matters that are of public record and/or
are referred to in the related lender's title insurance policy
or, if that policy has not yet been issued, referred to in a
pro forma title policy or a marked-up commitment, none of
which materially interferes with the security intended to be
provided by the related mortgage, deed of trust or other
similar security instrument, the current use of the property
or the current ability of the property to generate income
sufficient to service the related mortgage loan,
- exceptions and exclusions specifically referred to in the
related lender's title insurance policy or, if that policy has
not yet been issued, referred to in a pro forma title policy
or marked-up commitment, none of which materially interferes
with the security intended to be provided by the related
mortgage, deed of trust or similar security instrument, the
current use of the property or the current ability of the
property to generate income sufficient to service the related
mortgage loan,
- other matters to which like properties are commonly subject,
none of which materially interferes with the security intended
to be provided by the related mortgage, deed of trust or
similar security instrument, the current use of the property
or the current ability of the property to generate income
sufficient to service the related mortgage loan,
S-167
<PAGE>
- the rights of tenants to remain, whether under ground leases
or space leases, at the property following a foreclosure or
similar proceeding, provided that those tenants are performing
under their leases, and
- if the related mortgage loan is cross-collateralized with any
other mortgage loan, the lien of the mortgage, deed of trust
or other security instrument for that other mortgage loan.
"PERMITTED INVESTMENTS" means of U.S. government securities and other
investment grade obligations specified in the pooling and servicing agreement.
"POST-ARD ADDITIONAL INTEREST" means, with respect to any ARD Loan, the
additional interest accrued with respect to that mortgage loan as a result of
the marginal increase in the related mortgage interest rate upon passage of the
related anticipated repayment date, as that additional interest may compound in
accordance with the terms of that mortgage loan.
"PREPAYMENT INTEREST EXCESS" means, with respect to any full or partial
prepayment of a pooled mortgage loan made by the related borrower during any
collection period after the due date for that loan, the amount of any interest
collected on that prepayment for the period following that due date, less the
amount of related master servicing fees payable from that interest collection,
and exclusive of any Default Interest and Post-ARD Additional Interest included
in that interest collection.
"PREPAYMENT INTEREST SHORTFALL" means, with respect to any full or
partial prepayment of a pooled mortgage loan made by the related borrower during
any collection period prior to the due date for that loan, the amount of any
uncollected interest that would have accrued on that prepayment through that due
date, less the amount of related master servicing fees that would have been
payable from that uncollected interest, and exclusive of any portion of that
uncollected interest that represents Default Interest or Post-ARD Additional
Interest.
"REALIZED LOSSES" mean losses on or with respect of the pooled mortgage
loans arising from the inability of the master servicer and/or the special
servicer to collect all amounts due and owing under the mortgage loans,
including by reason of the fraud or bankruptcy of a borrower or, to the extent
not covered by insurance, a casualty of any nature at a mortgaged real property.
"REMIC" means a real estate mortgage investment conduit, within the
meaning of, and formed in accordance with, the Tax Reform Act of 1986 and
Sections 860A through 860G of the Internal Revenue Code of 1986.
"REO PROPERTY" means any mortgaged real property that is acquired by
the trust through foreclosure, deed-in-lieu of foreclosure or otherwise
following a default on the corresponding pooled mortgage loan.
"SEC" means the Securities and Exchange Commission.
"SERVICING STANDARD" means, with respect to either the master servicer
or the special servicer, to service and administer the pooled mortgage loans and
any real estate owned by the trust for which that party is responsible:
- with the same care, skill and diligence as is normal and usual
in its general mortgage servicing and asset management
activities with respect to comparable loans and real
properties that either are part of other third party
portfolios, giving
S-168
<PAGE>
due consideration to customary and usual standards of practice
of prudent institutional commercial lenders, or are held as
part of its own portfolio, whichever servicing procedures are
of a higher standard;
- with a view to--
1. the timely collection of all monthly debt service
payments under those mortgage loans,
2. the full collection of all prepayment premiums and
yield maintenance charges that may become payable
under those mortgage loans, and
3. in the case of the special servicer, if a mortgage
loan comes into and continues in default and, in the
judgment of the special servicer, no satisfactory
arrangements can be made for the collection of the
delinquent payments, including payments of prepayment
premiums and yield maintenance charges, the
maximization of the recovery on that defaulted
mortgage loan to the series _____ certificateholders,
as a collective whole, on a present value basis; and
- without regard to--
1. any known relationship that the master servicer or
the special servicer, as the case may be, or any of
its affiliates may have with any of the underlying
borrowers or any other party to the pooling and
servicing agreement,
2. the ownership of any series _____ certificate by the
master servicer or the special servicer, as the case
may be, or by any of its affiliates,
3. the obligation of the master servicer or the special
servicer, as the case may be, to make advances,
4. the right of the master servicer or the special
servicer, as the case may be, or any of its
affiliates to receive reimbursement of costs, or the
sufficiency of any compensation payable to it under
the pooling and servicing agreement or with respect
to any particular transaction, and
5. the ownership, servicing or management by the master
servicer or the special servicer, as the case may be,
or any of its affiliates of any other loans or real
properties not included in or securing, as the case
may be, the mortgage pool, or the right to service or
manage for others any other loans or real properties.
"SERVICING TRANSFER EVENT" means, with respect to any mortgage loan in
the trust, any of the following events:
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<PAGE>
1. the related borrower fails to make when due any monthly debt
service payment, including a balloon payment, or any other
payment required under the related promissory note or the
related mortgage, and either the failure actually continues,
or the master servicer believes it will continue, unremedied
for _____ days;
2. the master servicer determines that a default in the making of
a monthly debt service payment, including a balloon payment,
or any other material payment required to be made under the
related promissory note or the related mortgage, is likely to
occur within _____ days and either--
- the default is likely to remain unremedied for at
least _____ days, or
- the related borrower has requested a material
modification of the related mortgage loan;
3. the master servicer determines that a non-payment default has
occurred under the mortgage loan that may materially impair
the value of the corresponding mortgaged real property as
security for the mortgage loan and the default continues
unremedied for the applicable cure period under the terms of
the mortgage loan or, if no cure period is specified, for
_____ days;
4. various events of bankruptcy, insolvency, readjustment of
debt, marshalling of assets and liabilities, or similar
proceedings occur with respect to the related borrower or the
corresponding mortgaged real property, or the related borrower
takes various actions indicating its bankruptcy, insolvency or
inability to pay its obligations; or
5. the master servicer receives notice of the commencement of
foreclosure or similar proceedings with respect to the corresponding mortgaged
real property.
A Servicing Transfer Event will cease to exist, if and when:
- with respect to the circumstances described in clause 1. of
this definition, the related borrower makes three consecutive
full and timely monthly debt service payments under the terms
of the mortgage loan, as those terms may be changed or
modified in connection with a bankruptcy or similar proceeding
involving the related borrower or by reason of a modification,
waiver or amendment granted or agreed to by the master
servicer or the special servicer;
- with respect to the circumstances described in clauses 2. and
4. of this definition, those circumstances cease to exist in
the good faith, reasonable judgment of the special servicer,
but, with respect to any bankruptcy or insolvency proceedings
contemplated by clause 4., no later than the entry of an order
or decree dismissing the proceeding;
S-170
<PAGE>
- with respect to the circumstances described in clause 3. of
this definition, the default is cured in the judgment of the
special servicer; and
- with respect to the circumstances described in clause 5. of
this definition, the proceedings are terminated.
"STATED PRINCIPAL BALANCE" means, for each mortgage loan in the trust,
an amount that:
- will initially equal its cut-off date principal balance; and
- will be permanently reduced on each subsequent payment date,
to not less than zero, by--
1. that portion, if any, of the Total Principal Payment
Amount for that payment date that is attributable to
that mortgage loan, and
2. the principal portion of any Realized Loss incurred
with respect to that mortgage loan during the related
collection period.
However, the "Stated Principal Balance" of a mortgage loan will, in all
cases, be zero as of the payment date following the collection period in which
it is determined that all amounts ultimately collectible with respect to the
mortgage loan or any related REO Property have been received.
"TOTAL PRINCIPAL PAYMENT AMOUNT" means, for any payment date, an amount
equal to the total, without duplication, of the following:
- all payments of principal, including voluntary principal
prepayments, received on the pooled mortgage loans during the
related collection period, exclusive of any of those payments
that represents a late collection of principal for which an
advance was previously made for a prior payment date or that
represents a monthly payment of principal due on or before the
cut-off date or on a due date subsequent to the end of the
related collection period;
- all monthly payments of principal received on the pooled
mortgage loans prior to, but that are due during, the related
collection period;
- all other collections, including liquidation proceeds,
condemnation proceeds, insurance proceeds and repurchase
proceeds, that were received on or with respect to any of the
pooled mortgage loans or any related REO Properties during the
related collection period and that were identified and applied
by the master servicer as recoveries of principal of the
subject mortgage loan or, in the case of an REO Property, of
the related mortgage loan, in each case net of any portion of
the particular collection that represents a late collection of
principal due on or before the cut-off date or for which an
advance of principal was previously made for a prior payment
date; and
S-171
<PAGE>
- all advances of principal made with respect to the mortgage
loans for that payment date.
"WEIGHTED AVERAGE POOL PASS-THROUGH RATE" means, for each payment date,
the weighted average of the following annual rates with respect to all of the
mortgage loans in the trust, weighted on the basis of the mortgage loans'
respective Stated Principal Balances immediately prior to that payment date:
- in the case of each mortgage loan that accrues interest on a
30/360 basis, an annual rate equal to--
1. the mortgage interest rate in effect for that
mortgage loan as of the cut-off date, minus
2. the sum of the related master servicing fee rate,
plus ____% per annum; and
- in the case of each mortgage loan that accrues interest on an
actual/360 basis, an annual rate generally equal to--
1. a fraction, expressed as a percentage, the
numerator of which is, subject to adjustment as
described below in this bullet point, the product
12 times the amount of interest that accrued or
would have accrued with respect to that mortgage
loan on an actual/360 basis during the related
interest accrual period, based on its Stated
Principal Balance immediately preceding that
payment date and its mortgage interest rate in
effect as of the cut-off date, and the denominator
of which is the Stated Principal Balance of the
mortgage loan immediately prior to that payment
date, minus
2. the sum of the related master servicing fee rate,
plus ____% per annum.
Notwithstanding the foregoing, if the subject payment date occurs
during January, except during a leap year, or February, then, in the case of any
particular mortgage loan that accrues interest on an actual/360 basis, the
amount of interest referred to in the numerator of the fraction described in
clause 1. of the second bullet point above will be decreased to reflect any
interest reserve amount with respect to that mortgage loan that is transferred
from the trustee's collection account to the trustee's interest reserve account
during that month. Furthermore, if the subject payment date occurs during March,
then, in the case of any particular mortgage loan that accrues interest on an
actual/360 basis, the amount of interest referred to in the numerator of the
fraction described in clause 1. of the second bullet point above will be
increased to reflect any interest reserve amounts with respect to that mortgage
loan that are transferred from the trustee's interest reserve account to the
trustee's collection account during that month.
"USAP" means the Uniform Single Attestation Program for Mortgage
Bankers established by the Mortgage Bankers of America.
[INCLUDE OTHER TERMS THAT ARE TO BE USED IN THE ANNEXES TO THIS
PROSPECTUS SUPPLEMENT.]
S-172
<PAGE>
The attached diskette contains one spreadsheet file that can be put on a
user-specified hard drive or network drive. This spreadsheet file is
"___________________". The spreadsheet file "__________________" is a Microsoft
Excel(1), Version 5.0 spreadsheet. The file provides, in electronic format, some
of the statistical information that appears under the caption "Description of
the Mortgage Pool" in, and on Annexes A-1 and A-2 to, this prospectus
supplement. Defined terms used, but not otherwise defined, in the spreadsheet
file will have the respective meanings assigned to them in this prospectus
supplement. All the information contained in the spreadsheet file is subject to
the same limitations and qualifications contained in this prospectus supplement.
Prospective investors are strongly urged to read this prospectus supplement and
accompanying prospectus in its entirety prior to accessing the spreadsheet file.
----------
(1) Microsoft Excel is a registered trademark of Microsoft Corporation.
<PAGE>
================================================================================
PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
Important Notice About the Information Contained in this
Prospectus Supplement, The Accompanying Prospectus
and The Related Registration Statement................ S-3
Summary of Prospectus Supplement...................... S-7
Risk Factors.......................................... S-37
Forward-Looking Statements............................ S-51
Description of the Mortgage Pool...................... S-51
Servicing of the Underlying Mortgage Loans............ S-56
Description of the Offered Certificates............... S-111
Yield and Maturity Considerations..................... S-140
Use of Proceeds....................................... S-149
Federal Income Tax Consequences....................... S-150
Certain ERISA Considerations.......................... S-154
Legal Investment...................................... S-160
Method of Distribution................................ S-161
Legal Matters......................................... S-162
Ratings............................................... S-162
ANNEX A-1--Certain Characteristics of the
Underlying Mortgage Loans............................. A-1-1
ANNEX A-2--Certain Monetary Terms of the
Underlying Mortgage Loans............................. A-2-1
ANNEX B--Term Sheet................................... B-1
ANNEX C-1--Price/Yield Tables......................... C-1-1
ANNEX C-2--Decrement Tables........................... C-2-1
ANNEX D--Form of Delinquent Loan Status Report........ D-1
ANNEX E--Form of Historical Loan Modification Report.. E-1
ANNEX F--Form of Historical Liquidation Report........ F-1
ANNEX G--Form of REO Status Report.................... G-1
ANNEX H--Form of Servicer Watch List Report........... H-1
ANNEX I--Form of Operating Statement Analysis Report.. I-1
ANNEX J--Form of NOI Adjustment Worksheet............. J-1
ANNEX K--Form of Comparative Financial Status Report.. K-1
PROSPECTUS
Important Notice About the Information Presented in
this Prospectus.................................... 3
Available Information; Incorporation by Reference..... 3
Summary of Prospectus................................. 4
Risk Factors.......................................... 13
Description of the Trust Assets....................... 33
Yield and Maturity Considerations..................... 56
Structured Asset Securities Corporation............... 62
Description of the Certificates....................... 63
Description of the Governing Documents................ 73
Description of Credit Support......................... 82
Certain Legal Aspects of Mortgage Loans............... 85
Federal Income Tax Consequences....................... 99
State and Other Tax Consequences...................... 141
ERISA Considerations.................................. 141
Legal Investment...................................... 146
Use of Proceeds....................................... 148
Method of Distribution................................ 148
Legal Matters......................................... 150
Financial Information................................. 150
Rating................................................ 150
</TABLE>
UNTIL _______________, ALL DEALERS THAT EFFECT TRANSACTIONS
IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING IN
THIS OFFERING, MAY BE REQUIRED TO DELIVER THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
==================================================
<PAGE>
$----------
(APPROXIMATE)
LB COMMERCIAL MORTGAGE TRUST ____
(DEPOSITOR)
CLASS A-1, CLASS A-2, CLASS B, CLASS C,
CLASS D, CLASS E, CLASS F AND CLASS X
SERIES _____ COMMERCIAL
MORTGAGE PASS-THROUGH CERTIFICATES
PROSPECTUS SUPPLEMENT
LEHMAN BROTHERS
==================================================
<PAGE>
PROSPECTUS
STRUCTURED ASSET SECURITIES CORPORATION, THE DEPOSITOR MORTGAGE
PASS-THROUGH CERTIFICATES, ISSUABLE IN SERIES
Our name is Structured Asset Securities Corporation. We intend to offer
from time to time mortgage pass-through certificates. These offers may be made
through one or more different methods, including offerings through underwriters.
We do not currently intend to list the offered certificates of any series on any
national securities exchange or the NASDAQ stock market. See "Method of
Distribution."
--------------------------------------------------------------------------------
THE OFFERED CERTIFICATES:
The offered certificates will be issuable in series. Each series of offered
certificates will--
? have its own series designation,
? consist of one or more classes with various payment characteristics,
? evidence beneficial ownership interests in a trust established by us,
and
? be payable solely out of the related trust assets.
No governmental agency or instrumentality will insure or guarantee payment on
the offered certificates. Neither we nor any of our affiliates are responsible
for making payments on the offered certificates if collections on the related
trust assets are insufficient.
--------------------------------------------------------------------------------
THE TRUST ASSETS:
The assets of each of our trusts will include--
? mortgage loans secured by first and junior liens on, or security
interests in, various interests in commercial and multifamily real
properties,
? mortgage-backed securities that directly or indirectly evidence
interests in, or are directly or indirectly secured by, those types of
mortgage loans, or
? some combination of those types of mortgage loans and mortgage-backed
securities.
Trust assets may also include letters of credit, surety bonds, insurance
policies, guarantees, credit derivatives, reserve funds, guaranteed investment
contracts, interest rate exchange agreements, interest rate cap or floor
agreements, currency exchange agreements, or other similar instruments and
agreements.
--------------------------------------------------------------------------------
In connection with each offering, we will prepare a supplement to this
prospectus in order to describe in more detail the particular certificates being
offered and the related trust assets. In that document, we will also state the
price to public for each class of offered certificates or explain the method for
determining that price. In that document, we will also identify the applicable
lead or managing underwriter(s), if any, and provide information regarding the
relevant underwriting arrangements and the underwriters' compensation. You
may not purchase the offered certificates of any series unless you have also
received the prospectus supplement for that series. YOU SHOULD CAREFULLY
CONSIDER THE RISK FACTORS BEGINNING ON PAGE 15 IN THIS PROSPECTUS, AS WELL AS
THOSE SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT, PRIOR TO INVESTING.
--------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR PASSED
UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------------------------------------------------------
<PAGE>
The date of this prospectus is _____________________, 2000.
-2-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Important Notice About the Information Presented in This Prospectus..............3
Available Information; Incorporation by Reference................................3
Summary of Prospectus............................................................4
Risk Factors....................................................................14
Capitalized Terms Used in this Prospectus.......................................34
Description of the Trust Assets.................................................35
Yield and Maturity Considerations...............................................60
Structured Asset Securities Corporation.........................................66
Description of the Certificates.................................................66
Description Of The Governing Documents..........................................78
Description of Credit Support...................................................88
Certain Legal Aspects of Mortgage Loans.........................................91
Federal Income Tax Consequences................................................104
State and Other Tax Consequences...............................................153
ERISA Considerations...........................................................154
Legal Investment...............................................................158
Use of Proceeds................................................................160
Method of Distribution.........................................................160
Legal Matters..................................................................162
Financial Information..........................................................162
Rating.........................................................................162
Glossary.......................................................................163
</TABLE>
-3-
<PAGE>
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS
When deciding whether to invest in any of the offered certificates, you
should only rely on the information contained in this prospectus and the related
prospectus supplement. We have not authorized any dealer, salesman or other
person to give any information or to make any representation that is different.
In addition, information in this prospectus or any related prospectus supplement
is current only as of the date on its cover. By delivery of this prospectus and
any related prospectus supplement, we are not offering to sell any securities,
and are not soliciting an offer to buy any securities, in any state where the
offer and sale is not permitted.
AVAILABLE INFORMATION; INCORPORATION BY REFERENCE
We have filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the certificates offered by
this prospectus. This prospectus forms a part of the registration statement.
This prospectus and the related prospectus supplement do not contain all of the
information with respect to an offering that is contained in the registration
statement. For further information regarding the documents referred to in this
prospectus and the related prospectus supplement, you should refer to the
registration statement and its exhibits. You can inspect the registration
statement and its exhibits, and make copies of these documents at prescribed
rates, at the public reference facilities maintained by the SEC at its Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located as follows: Chicago Regional Office, 500 West Madison,
14th Floor, Chicago, Illinois 60661; and New York Regional Office, Seven World
Trade Center, New York, New York 10048. You can also obtain copies of these
materials electronically through the SEC's Web site (http://www.sec.gov).
In connection with each series of offered certificates, we will file or
arrange to have filed with the SEC with respect to the related trust any
periodic reports that are required under the Securities Exchange Act of 1934, as
amended. All documents and reports that are so filed for the related trust prior
to the termination of an offering of certificates are incorporated by reference
into, and should be considered a part of, this prospectus. Upon request, we will
provide without charge to each person receiving this prospectus in connection
with an offering, a copy of any or all documents or reports that are so
incorporated by reference. All requests should be directed to us in writing at
200 Vesey Street, New York, New York 10285, attention: Secretary, or by
telephone at 212-526-7000.
-4-
<PAGE>
SUMMARY OF PROSPECTUS
This summary contains selected information from this prospectus. It
does not contain all of the information you need to consider in making your
investment decision. TO UNDERSTAND ALL OF THE TERMS OF A PARTICULAR OFFERING OF
CERTIFICATES, YOU SHOULD READ CAREFULLY THIS PROSPECTUS AND THE RELATED
PROSPECTUS SUPPLEMENT IN FULL.
<TABLE>
<S> <C>
WHO WE ARE..................................... Structured Asset Securities Corporation is a Delaware corporation.
Our principal offices are located at 200 Vesey Street, New York,
New York 10285. Our main telephone number is 212-526-7000. See
"Structured Asset Securities Corporation."
THE SECURITIES BEING OFFERED................... The securities that will be offered by this prospectus and the
related prospectus supplements consist of mortgage pass-through
certificates. These certificates will be issued in series, and each
series will, in turn, consist of one or more classes. Each class of
offered certificates must, at the time of issuance, be assigned an
investment grade rating by at least one nationally recognized
statistical rating organization. Typically, the four highest rating
categories, within which there may be sub-categories or gradations
to indicate relative standing, signify investment grade. See
"Rating."
Each series of offered certificates will evidence beneficial
ownership interests in a trust established by us and containing the
assets described in this prospectus and the related prospectus
supplement.
THE OFFERED CERTIFICATES MAY BE
ISSUED WITH OTHER CERTIFICATES............ We may not publicly offer all the mortgage pass-through
certificates evidencing interests in one of our trusts. We may
elect to retain some of those certificates, to place some privately
with institutional investors or to deliver some to the applicable
seller as partial consideration for the related mortgage assets. In
addition, some of those certificates may not satisfy the rating
requirement for offered certificates described under "--The
Securities Being Offered" above.
THE GOVERNING DOCUMENTS........................ In general, a pooling and servicing agreement or other similar
agreement or collection of agreements will govern, among other
things--
- the issuance of each series of offered certificates,
</TABLE>
-5-
<PAGE>
<TABLE>
<S> <C>
- the creation of and transfer of assets to the related
trust, and
- the servicing and administration of those assets.
The parties to the governing document(s) for a series of offered
certificates will always include us and a trustee. We will be
responsible for establishing the trust relating to each series of
offered certificates. In addition, we will transfer or arrange for
the transfer of the initial trust assets to that trust. In general,
the trustee for a series of offered certificates will be
responsible for, among other things, making payments and preparing
and disseminating various reports to the holders of those offered
certificates.
If the trust assets for a series of offered certificates include
mortgage loans, the parties to the governing document(s) will also
include--
- a master servicer that will generally be responsible
for performing customary servicing duties with respect
to those mortgage loans that are not defaulted,
nonperforming or otherwise problematic in any material
respect, and
- a special servicer that will generally be responsible
for servicing and administering those mortgage loans
that are defaulted, nonperforming or otherwise
problematic in any material respect and real estate
assets acquired as part of the related trust with
respect to defaulted mortgage loans.
The same person or entity, or affiliated entities, may act as both
master servicer and special servicer for any trust.
If the trust assets for a series of offered certificates include
mortgage-backed securities, the parties to the governing
document(s) may also include a manager that will be responsible for
performing various administrative duties with respect to those
mortgage-backed securities. If the related trustee assumes those
duties, however, there will be no manager.
In the related prospectus supplement, we will identify the trustee
and any master servicer, special servicer or manager for
</TABLE>
-6-
<PAGE>
<TABLE>
<S> <C>
each series of offered certificates and will describe their
respective duties in further detail. See "Description of the
Governing Documents."
CHARACTERISTICS OF THE
MORTGAGE ASSETS........................... The trust assets with respect to any series of offered certificates
will, in general, include mortgage loans. Each of those mortgage
loans will constitute the obligation of one or more persons to
repay a debt. The performance of that obligation will be secured by
a first or junior lien on, or security interest in, the ownership,
leasehold or other interest(s) of the related borrower or another
person in or with respect to one or more commercial or multifamily
real properties. In particular, those properties may include:
- rental or cooperatively-owned buildings with multiple
dwelling units;
- retail properties related to the sale of consumer goods
and other products, or related to providing
entertainment, recreational or personal services, to
the general public;
- office buildings;
- hospitality properties;
- casino properties;
- health care-related facilities;
- industrial facilities;
- warehouse facilities, mini-warehouse facilities and
self-storage facilities;
- restaurants, taverns and other establishments involved
in the food and beverage industry;
</TABLE>
-7-
<PAGE>
<TABLE>
<S> <C>
- manufactured housing communities, mobile home parks and
recreational vehicle parks;
- recreational and resort properties;
- arenas and stadiums;
- churches and other religious facilities;
- parking lots and garages;
- mixed use properties;
- other income-producing properties; and
- unimproved land.
The mortgage loans underlying a series of offered certificates may
have a variety of payment terms. For example, any of those mortgage
loans--
- may provide for the accrual of interest at a mortgage
interest rate that is fixed over its term, that resets
on one or more specified dates or that otherwise
adjusts from time to time;
- may provide for the accrual of interest at a mortgage
interest rate that may be converted at the borrower's
election from an adjustable to a fixed interest rate or
from a fixed to an adjustable interest rate;
- may provide for no accrual of interest;
- may provide for level payments to stated maturity, for
payments that reset in amount on one or more specified
dates or for payments that otherwise adjust from time
to time to
</TABLE>
-8-
<PAGE>
<TABLE>
<S> <C>
accommodate changes in the mortgage interest rate or to
reflect the occurrence of specified events;
- may be fully amortizing or, alternatively, may be
partially amortizing or nonamortizing, with a
substantial payment of principal due on its stated
maturity date;
- may permit the negative amortization or deferral of
accrued interest;
- may prohibit some or all voluntary prepayments or
require payment of a premium, fee or charge in
connection with those prepayments;
- may permit defeasance and the release of real property
collateral in connection with that defeasance;
- may provide for payments of principal, interest or
both, on due dates that occur monthly, bi-monthly,
quarterly, semi-annually, annually or at some other
interval; and/or
- may have two or more component parts, each having
characteristics that are otherwise described in this
prospectus as being attributable to separate and
distinct mortgage loans.
Most, if not all, of the mortgage loans underlying a series of
offered certificates will be secured by liens on real properties
located in the United States, its territories and possessions.
However, some of those mortgage loans may be secured by liens on
real properties located outside the United States, its territories
and possessions, provided that foreign mortgage loans do not
represent more than 10% of the related mortgage asset pool, by
balance.
We do not originate mortgage loans. However, some or all of the
mortgage loans included in one of our trusts may be originated by
our affiliates.
Neither we nor any of our affiliates will guarantee or insure
repayment of any of the mortgage loans underlying a series of
offered certificates. Unless we expressly state otherwise in the
related prospectus supplement, no governmental agency or
instrumentality will guarantee or insure repayment of any of the
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mortgage loans underlying a series of offered certificates. See
"Description of the Trust Assets--Mortgage Loans."
The trust assets with respect to any series of offered certificates
may also include mortgage participations, mortgage pass-through
certificates, collateralized mortgage obligations and other
mortgage-backed securities, that evidence an interest in, or are
secured by a pledge of, one or more mortgage loans of the type
described above. We will not include a mortgage-backed security
among the trust assets with respect to any series of offered
certificates unless--
- the security has been registered under the Securities
Act of 1933, as amended, or
- we would be free to publicly resell the security
without registration.
See "Description of the Trust Assets--Mortgage-Backed Securities."
We will describe the specific characteristics of the mortgage
assets underlying a series of offered certificates in the related
prospectus supplement.
In general, the total outstanding principal balance of the mortgage
assets transferred by us to any particular trust will equal or
exceed the initial total outstanding principal balance of the
related series of certificates. In the event that the total
outstanding principal balance of the related mortgage assets
initially delivered by us to the related trustee is less than the
initial total outstanding principal balance of any series of
certificates, we may deposit or arrange for the deposit of cash or
liquid investments on an interim basis with the related trustee to
cover the shortfall. For 90 days following the date of initial
issuance of that series of certificates, we will be entitled to
obtain a release of the deposited cash or investments if we deliver
or arrange for delivery of a corresponding amount of mortgage
assets. If we fail, however, to deliver mortgage assets sufficient
to make up the entire shortfall, any of the cash or, following
liquidation, investments remaining on deposit with the related
trustee will be used by the related trustee to pay down the total
principal balance of the related series of certificates, as
described in the related prospectus supplement.
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SUBSTITUTION, ACQUISITION AND
REMOVAL OF MORTGAGE ASSETS................ If so specified in the related prospectus supplement, we or another
specified person or entity may be permitted, at our or its option,
but subject to the conditions specified in that prospectus
supplement, to acquire from the related trust particular mortgage
assets underlying a series of certificates in exchange for:
- cash that would be applied to pay down the principal
balances of certificates of that series; and/or
- other mortgage loans or mortgage-backed securities
that--
1. conform to the description of mortgage assets in
this prospectus, and
2. satisfy the criteria set forth in the related
prospectus supplement.
In addition, if so specified in the related prospectus supplement,
the related trustee may be authorized or required, to apply
collections on the mortgage assets underlying a series of offered
certificates to acquire new mortgage loans or mortgage-backed
securities that--
1. conform to the description of mortgage assets in this
prospectus, and
2. satisfy the criteria set forth in the related prospectus
supplement.
No replacement of mortgage assets or acquisition of new mortgage
assets will be permitted if it would result in a qualification,
downgrade or withdrawal of the then-current rating assigned by any
rating agency to any class of affected offered certificates.
CHARACTERISTICS OF
THE OFFERED CERTIFICATES.................. An offered certificate may entitle the holder to receive:
- a stated principal amount;
- interest on a principal balance or notional amount, at
a fixed, variable or adjustable pass-through rate;
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- specified, fixed or variable portions of the interest,
principal or other amounts received on the related
mortgage assets;
- payments of principal, with disproportionate, nominal
or no payments of interest;
- payments of interest, with disproportionate, nominal or
no payments of principal;
- payments of interest or principal that commence only as
of a specified date or only after the occurrence of
specified events, such as the payment in full of the
interest and principal outstanding on one or more other
classes of certificates of the same series;
- payments of principal to be made, from time to time or
for designated periods, at a rate that is--
1. faster and, in some cases, substantially faster, or
2. slower and, in some cases, substantially slower,
than the rate at which payments or other collections of
principal are received on the related mortgage assets;
- payments of principal to be made, subject to available
funds, based on a specified principal payment schedule
or other methodology; or
- payments of all or part of the prepayment or repayment
premiums, fees and charges, equity participations
payments or other similar items received on the related
mortgage assets.
Any class of offered certificates may be senior or subordinate to
one or more other classes of certificates of the same series,
including a non-offered class of certificates of that series, for
purposes of some or all payments and/or allocations of losses.
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A class of offered certificates may have two or more component
parts, each having characteristics that are otherwise described in
this prospectus as being attributable to separate and distinct
classes.
We will describe the specific characteristics of each class of
offered certificates in the related prospectus supplement. See
"Description of the Certificates."
CREDIT SUPPORT AND REINVESTMENT,
INTEREST RATE AND CURRENCY
RELATED PROTECTION FOR
THE OFFERED CERTIFICATES.................. Some classes of offered certificates may be protected in full or in
part against defaults and losses, or select types of defaults and
losses, on the related mortgage assets through the subordination of
one or more other classes of certificates of the same series or by
other types of credit support. The other types of credit support
may include a letter of credit, a surety bond, an insurance policy,
a guarantee, a credit derivative or a reserve fund. We will
describe the credit support, if any, for each class of offered
certificates in the related prospectus supplement.
The trust assets with respect to any series of offered certificates
may also include any of the following agreements:
- guaranteed investment contracts in accordance with
which moneys held in the funds and accounts established
with respect to those offered certificates will be
invested at a specified rate;
- interest rate exchange agreements, interest rate cap or
floor agreements, or other agreements and arrangements
designed to reduce the effects of interest rate
fluctuations on the related mortgage assets or on one
or more classes of those offered certificates; or
- currency exchange agreements or other agreements and
arrangements designed to reduce the effects of currency
exchange rate fluctuations with respect to the related
mortgage assets and one or more classes of those
offered certificates.
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We will describe the types of reinvestment, interest rate and
currency related protection, if any, for each class of offered
certificates in the related prospectus supplement.
See "Risk Factors," "Description of the Trust Assets" and
"Description of Credit Support."
ADVANCES WITH RESPECT
TO THE MORTGAGE ASSETS.................... If the trust assets for a series of offered certificates include
mortgage loans, then, as and to the extent described in the related
prospectus supplement, the related master servicer, the related
special servicer, the related trustee, any related provider of
credit support and/or any other specified person may be obligated
to make, or may have the option of making, advances with respect to
those mortgage loans to cover--
- delinquent scheduled payments of principal and/or
interest, other than balloon payments,
- property protection expenses,
- other servicing expenses, or
- any other items specified in the related prospectus
supplement.
Any party making advances will be entitled to reimbursement from
subsequent recoveries on the related mortgage loan and as otherwise
described in this prospectus or the related prospectus supplement.
That party may also be entitled to receive interest on its advances
for a specified period. See "Description of the
Certificates--Advances."
If the trust assets for a series of offered certificates include
mortgage-backed securities, we will describe in the related
prospectus supplement any comparable advancing obligations with
respect to those mortgage-backed securities or the underlying
mortgage loans.
OPTIONAL TERMINATION........................... We will describe in the related prospectus supplement any
circumstances in which a specified party is permitted or obligated
to purchase or sell any of the mortgage assets underlying a series
of offered certificates. In particular, a master servicer, special
servicer or other designated party may be permitted or obligated to
purchase or sell--
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- all the mortgage assets in any particular trust,
thereby resulting in a termination of the trust, or
- that portion of the mortgage assets in any particular
trust as is necessary or sufficient to retire one or
more classes of offered certificates of the related
series.
See "Description of the Certificates--Termination."
FEDERAL INCOME
TAX CONSEQUENCES............................ Any class of offered certificates will constitute or evidence
ownership of:
- regular interests or residual interests in a real
estate mortgage investment conduit under Sections 860A
through 860G of the Internal Revenue Code of 1986; or
- regular interests in a financial asset securitization
investment trust within the meaning of Section 860L(a)
of the Internal Revenue Code of 1986; or
- interests in a grantor trust under Subpart E of Part I
of Subchapter J of the Internal Revenue Code of 1986.
See "Federal Income Tax Consequences."
ERISA CONSIDERATIONS........................... If you are a fiduciary of an employee benefit plan or other
retirement plan or arrangement, you should review with your legal
advisor whether the purchase or holding of offered certificates
could give rise to a transaction that is prohibited or is not
otherwise permissible under applicable law. See "ERISA Considerations."
LEGAL INVESTMENT............................... If your investment authority is subject to legal restrictions, you
should consult your legal advisor to determine whether and to what
extent the offered certificates constitute a legal investment for
you. We will specify in the related prospectus supplement which
classes of the offered certificates will constitute mortgage
related securities for purposes
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of the Secondary Mortgage Market Enhancement Act of 1984, as
amended. See "Legal Investment."
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RISK FACTORS
You should consider the following factors, as well as the factors set
forth under "Risk Factors" in the related prospectus supplement, in deciding
whether to purchase offered certificates.
LACK OF LIQUIDITY WILL IMPAIR YOUR ABILITY TO SELL YOUR OFFERED CERTIFICATES AND
MAY HAVE AN ADVERSE EFFECT ON THE MARKET VALUE OF YOUR OFFERED CERTIFICATES
The offered certificates may have limited or no liquidity. We cannot
assure you that a secondary market for your offered certificates will develop.
There will be no obligation on the part of anyone to establish a secondary
market. Even if a secondary market does develop for your offered certificates,
it may provide you with less liquidity than you anticipated and it may not
continue for the life of your offered certificates.
We will describe in the related prospectus supplement the information
that will be available to you with respect to your offered certificates. The
limited nature of the information may adversely affect the liquidity of your
offered certificates.
We do not currently intend to list the offered certificates on any
national securities exchange or the NASDAQ stock market.
Lack of liquidity will impair your ability to sell your offered
certificates and may prevent you from doing so at a time when you may want or
need to. Lack of liquidity could adversely affect the market value of your
offered certificates. We do not expect that you will have any redemption rights
with respect to your offered certificates.
If you decide to sell your offered certificates, you may have to sell
them at a discount from the price you paid for reasons unrelated to the
performance of your offered certificates or the related mortgage assets. Pricing
information regarding your offered certificates may not be generally available
on an ongoing basis.
THE MARKET VALUE OF YOUR OFFERED CERTIFICATES MAY BE ADVERSELY AFFECTED BY TO
FACTORS UNRELATED TO THE PERFORMANCE OF YOUR OFFERED CERTIFICATES AND THE
UNDERLYING MORTGAGE ASSETS, SUCH AS FLUCTUATIONS IN INTEREST RATES AND THE
SUPPLY AND DEMAND OF CMBS GENERALLY
The market value of your offered certificates can decline even if those
certificates and the underlying mortgage assets are performing at or above your
expectations.
The market value of your offered certificates will be sensitive to
fluctuations in current interest rates. However, a change in the market value of
your offered certificates as a result of an upward or downward movement in
current interest rates may not equal the change in the market value of your
offered certificates as a result of an equal but opposite movement in interest
rates.
The market value of your offered certificates will also be influenced
by the supply of and demand for commercial mortgage-backed securities generally.
The supply of commercial mortgage-backed securities will depend on, among other
things, the amount of commercial and multifamily
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mortgage loans, whether newly originated or held in portfolio, that are
available for securitization. A number of factors will affect investors' demand
for commercial mortgage-backed securities, including--
- the availability of alternative investments that offer higher
yields or are perceived as being a better credit risk, having
a less volatile market value or being more liquid,
- legal and other restrictions that prohibit a particular entity
from investing in commercial mortgage-backed securities or
limit the amount or types of commercial mortgage-backed
securities that it may acquire,
- investors' perceptions regarding the commercial and
multifamily real estate markets, which may be adversely
affected by, among other things, a decline in real estate
values or an increase in defaults and foreclosures on mortgage
loans secured by income-producing properties, and
- investors' perceptions regarding the capital markets in
general, which may be adversely affected by political, social
and economic events completely unrelated to the commercial and
multifamily real estate markets.
If you decide to sell your offered certificates, you may have to sell
at discount from the price you paid for reasons unrelated to the performance of
your offered certificates or the related mortgage assets. Pricing information
regarding your offered certificates may not be generally available on an ongoing
basis.
PAYMENTS ON THE OFFERED CERTIFICATES WILL BE MADE SOLELY FROM THE LIMITED ASSETS
OF THE RELATED TRUST, AND THOSE ASSETS MAY BE INSUFFICIENT TO MAKE ALL REQUIRED
PAYMENTS ON THOSE CERTIFICATES
The offered certificates do not represent obligations of any person or
entity and do not represent a claim against any assets other than those of the
related trust. No governmental agency or instrumentality will guarantee or
insure payment on the offered certificates. In addition, neither we nor our
affiliates are responsible for making payments on the offered certificates if
collections on the related trust assets are insufficient. If the related trust
assets are insufficient to make payments on your offered certificates, no other
assets will be available to you for payment of the deficiency, and you will bear
the resulting loss. Any advances made by a master servicer or other party with
respect to the mortgage assets underlying your offered certificates are intended
solely to provide liquidity and not credit support. The party making those
advances will have a right to reimbursement, probably with interest, which is
senior to your right to receive payment on your offered certificates.
ANY CREDIT SUPPORT FOR YOUR OFFERED CERTIFICATES MAY BE INSUFFICIENT TO PROTECT
YOU AGAINST ALL POTENTIAL LOSSES
THE AMOUNT OF CREDIT SUPPORT WILL BE LIMITED. The rating agencies that
assign ratings to your offered certificates will establish the amount of credit
support, if any, for your offered certificates based on, among other things, an
assumed level of defaults, delinquencies and losses with respect to the related
mortgage assets. Actual losses may, however, exceed the assumed levels. See
"Description of the Certificates--Allocation of Losses and Shortfalls" and
"Description of Credit Support." If actual losses on the related mortgage assets
exceed the assumed levels, you may be required to bear the additional losses.
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CREDIT SUPPORT MAY NOT COVER ALL TYPES OF LOSSES. The credit support,
if any, for your offered certificates may not cover all of your potential
losses. For example, some forms of credit support may not cover or may provide
limited protection against losses that you may suffer by reason of fraud or
negligence or as a result of uninsured casualties at the real properties
securing the underlying mortgage loans. You may be required to bear any losses
which are not covered by the credit support.
DISPROPORTIONATE BENEFITS MAY BE GIVEN TO SOME CLASSES AND SERIES TO
THE DETRIMENT OF OTHERS. If a form of credit support covers multiple classes or
series and losses exceed the amount of such credit support, it is possible that
the holders of offered certificates of another series or class will be
disproportionately benefited by that credit support to your detriment.
THE INVESTMENT PERFORMANCE OF YOUR OFFERED CERTIFICATES WILL DEPEND UPON
PAYMENTS, DEFAULTS AND LOSSES ON THE UNDERLYING MORTGAGE LOANS; AND THOSE
PAYMENTS, DEFAULTS AND LOSSES MAY BE HIGHLY UNPREDICTABLE
THE TERMS OF THE UNDERLYING MORTGAGE LOANS WILL AFFECT PAYMENTS ON YOUR
OFFERED CERTIFICATES. Each of the mortgage loans underlying the offered
certificates will specify the terms on which the related borrower must repay the
outstanding principal amount of the loan. The rate, timing and amount of
scheduled payments of principal may vary, and may vary significantly, from
mortgage loan to mortgage loan. The rate at which the underlying mortgage loans
amortize will directly affect the rate at which the principal balance or
notional amount of your offered certificates is paid down or otherwise reduced.
In addition, any mortgage loan underlying the offered certificates may
permit the related borrower during some or all of the loan term to prepay the
loan. In general, a borrower will be more likely to prepay its mortgage loan
when it has an economic incentive to do so, such as obtaining a larger loan on
the same underlying real property or a lower or otherwise more advantageous
interest rate through refinancing. If a mortgage loan includes some form of
prepayment restriction, the likelihood of prepayment should decline. These
restrictions may include--
- an absolute or partial prohibition against voluntary
prepayments during some or all of the loan term, or
- a requirement that voluntary prepayments be accompanied by
some form of prepayment premium, fee or charge during some or
all of the loan term.
In many cases, however, there will be no restriction associated with the
application of insurance proceeds or condemnation proceeds as a prepayment of
principal.
THE TERMS OF THE UNDERLYING MORTGAGE LOANS DO NOT PROVIDE ABSOLUTE
CERTAINTY AS REGARDS THE RATE, TIMING AND AMOUNT OF PAYMENTS ON YOUR OFFERED
CERTIFICATES. Notwithstanding the terms of the mortgage loans backing your
offered certificates, the amount, rate and timing of payments and other
collections on those mortgage loans will, to some degree, be unpredictable
because of borrower defaults and because of casualties and condemnations with
respect to the underlying real properties.
The investment performance of your offered certificates may vary
materially and adversely from your expectations due to--
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- the rate of prepayments and other unscheduled collections of
principal on the underlying mortgage loans being faster or
slower than you anticipated, or
- the rate of defaults on the underlying mortgage loans being
faster, or the severity of losses on the underlying mortgage
loans being greater, than you anticipated.
The actual yield to you, as a holder of an offered certificate, may not
equal the yield you anticipated at the time of your purchase, and the total
return on investment that you expected may not be realized. In deciding whether
to purchase any offered certificates, you should make an independent decision as
to the appropriate prepayment, default and loss assumptions to be used. If the
trust assets underlying your offered certificates include mortgage-backed
securities, the terms of those securities may soften or enhance the effects to
you that may result from prepayments, defaults and losses on the mortgage loans
that ultimately back those securities.
PREPAYMENTS ON THE UNDERLYING MORTGAGE LOANS WILL AFFECT THE AVERAGE
LIFE OF YOUR OFFERED CERTIFICATES; AND THE RATE AND TIMING OF THOSE PREPAYMENTS
MAY BE HIGHLY UNPREDICTABLE. Payments of principal and/or interest on your
offered certificates will depend upon, among other things, the rate and timing
of payments on the related mortgage assets. Prepayments on the underlying
mortgage loans may result in a faster rate of principal payments on your offered
certificates, thereby resulting in a shorter average life for your offered
certificates than if those prepayments had not occurred. The rate and timing of
principal prepayments on pools of mortgage loans varies among pools and is
influenced by a variety of economic, demographic, geographic, social, tax and
legal factors. Accordingly, neither you nor we can predict the rate and timing
of principal prepayments on the mortgage loans underlying your offered
certificates. As a result, repayment of your offered certificates could occur
significantly earlier or later, and the average life of your offered
certificates could be significantly shorter or longer, than you expected.
The extent to which prepayments on the underlying mortgage loans
ultimately affect the average life of your offered certificates depends on the
terms and provisions of your offered certificates. A class of offered
certificates may entitle the holders to a PRO RATA share of any prepayments on
the underlying mortgage loans, to all or a disproportionately large share of
those prepayments, or to none or a disproportionately small share of those
prepayments. If you are entitled to a disproportionately large share of any
prepayments on the underlying mortgage loans, your offered certificates may be
retired at an earlier date. If, however, you are only entitled to a small share
of the prepayments on the underlying mortgage loans, the average life of your
offered certificates may be extended. Your entitlement to receive payments,
including prepayments, of principal of the underlying mortgage loans may--
- vary based on the occurrence of specified events, such as the
retirement of one or more other classes of certificates of the
same series, or
- be subject to various contingencies, such as prepayment and
default rates with respect to the underlying mortgage loans.
We will describe the terms and provisions of your offered certificates
more fully in the related prospectus supplement.
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PREPAYMENTS ON THE UNDERLYING MORTGAGE LOANS WILL AFFECT THE YIELD ON
YOUR OFFERED CERTIFICATES; AND THE RATE AND TIMING OF THOSE PREPAYMENTS MAY BE
HIGHLY UNPREDICTABLE. If you purchase your offered certificates at a discount or
premium, the yield on your offered certificates will be sensitive to prepayments
on the underlying mortgage loans. If you purchase your offered certificates at a
discount, you should consider the risk that a slower than anticipated rate of
principal payments on the underlying mortgage loans could result in your actual
yield being lower than your anticipated yield. Alternatively, if you purchase
your offered certificates at a premium, you should consider the risk that a
faster than anticipated rate of principal payments on the underlying mortgage
loans could result in your actual yield being lower than your anticipated yield.
The potential effect that prepayments may have on the yield of your offered
certificates will increase as the discount deepens or the premium increases. If
the amount of interest payable on your offered certificates is
disproportionately large, as compared to the amount of principal payable on your
offered certificates, you may fail to recover your original investment under
some prepayment scenarios. The rate and timing of principal prepayments on pools
of mortgage loans varies among pools and is influenced by a variety of economic,
demographic, geographic, social, tax and legal factors. Accordingly, neither you
nor we can predict the rate and timing of principal prepayments on the mortgage
loans underlying your offered certificates.
DELINQUENCIES, DEFAULTS AND LOSSES ON THE UNDERLYING MORTGAGE LOANS MAY
AFFECT THE AMOUNT AND TIMING OF PAYMENTS ON YOUR OFFERED CERTIFICATES; AND THE
RATE AND TIMING OF THOSE DELINQUENCIES AND DEFAULTS, AND THE SEVERITY OF THOSE
LOSSES, ARE HIGHLY UNPREDICTABLE. The rate and timing of delinquencies and
defaults, and the severity of losses, on the underlying mortgage loans will
impact the amount and timing of payments on a series of offered certificates to
the extent that their effects are not offset by delinquency advances or some
form of credit support.
Unless otherwise covered by delinquency advances or some form of credit
support, defaults on the underlying mortgage loans may delay payments on a
series of offered certificates while the defaulted mortgage loans are worked-out
or liquidated. However, liquidations of defaulted mortgage loans prior to
maturity could affect the yield and average life of an offered certificate in a
manner similar to a voluntary prepayment.
If you calculate your anticipated yield to maturity based on an assumed
rate of default and amount of losses on the underlying mortgage loans that is
lower than the default rate and amount of losses actually experienced, then, to
the extent that you are required to bear the additional losses, your actual
yield to maturity will be lower than you calculated and could, under some
scenarios, be negative. Furthermore, the timing of losses on the underlying
mortgage loans can affect your yield. In general, the earlier you bear any loss
on an underlying mortgage loan, the greater the negative effect on your yield.
See "--Repayment of a Commercial or Multifamily Mortgage Loan Depends
Upon the Performance and Value of the Underlying Real Property, Which May
Decline Over Time, and the Related Borrower's Ability to Refinance the
Property, of Which There is no Assurance" below.
THERE IS AN INCREASED RISK OF DEFAULT ASSOCIATED WITH BALLOON PAYMENTS.
Any of the mortgage loans underlying your offered certificates may be
nonamortizing or only partially amortizing. The borrower under a mortgage loan
of that type is required to make substantial payments of principal and interest,
which are commonly called balloon payments, on the maturity date of the loan.
The
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ability of the borrower to make a balloon payment depends upon the borrower's
ability to refinance or sell the real property securing the loan. The ability of
the borrower to refinance or sell the property will be affected by a number of
factors, including:
- the fair market value and condition of the underlying real
property;
- the level of interest rates;
- the borrower's equity in the underlying real property;
- the borrower's financial condition;
- the operating history of the underlying real property;
- changes in zoning and tax laws;
- changes in competition in the relevant area;
- changes in rental rates in the relevant area;
- changes in governmental regulation and fiscal policy;
- prevailing general and regional economic conditions;
- the state of the fixed income and mortgage markets; and
- the availability of credit for multifamily rental or
commercial properties.
See "--Repayment of a Commercial or Multifamily Mortgage Loan Depends
Upon the Performance and Value of the Underlying Real Property, Which May
Decline Over Time, and the Related Borrower's Ability to Refinance the
Property, of Which There is no Assurance" below.
Neither we nor any of our affiliates will be obligated to refinance any
mortgage loan underlying your offered certificates.
The related master servicer or special servicer may, within prescribed
limits, extend and modify mortgage loans underlying your offered certificates
that are in default or as to which a payment default is imminent in order to
maximize recoveries on the defaulted loans. The related master servicer or
special servicer is only required to determine that any extension or
modification is reasonably likely to produce a greater recovery than a
liquidation of the real property securing the defaulted loan. There is a risk
that the decision of the master servicer or special servicer to extend or modify
a mortgage loan may not in fact produce a greater recovery.
REPAYMENT OF A COMMERCIAL OR MULTIFAMILY MORTGAGE LOAN DEPENDS UPON THE
PERFORMANCE AND VALUE OF THE UNDERLYING REAL PROPERTY, WHICH MAY DECLINE OVER
TIME, AND THE RELATED BORROWER'S ABILITY TO REFINANCE THE PROPERTY, OF WHICH
THERE IS NO ASSURANCE
MOST OF THE MORTGAGE LOANS UNDERLYING YOUR OFFERED CERTIFICATES WILL BE
NONRECOURSE. You should consider all of the mortgage loans underlying your
offered certificates to be nonrecourse loans. This means that, in the event of a
default, recourse will be limited to the related real property or properties
securing the defaulted mortgage loan. In those cases where recourse to a
borrower or guarantor is permitted by the loan documents, we generally will not
undertake any evaluation of the financial condition of that borrower or
guarantor. Consequently, full and timely payment on each mortgage loan
underlying your offered certificates will depend on one or more of the
following:
- the sufficiency of the net operating income of the applicable
real property;
- the market value of the applicable real property at or prior
to maturity; and
- the ability of the related borrower to refinance or sell the
applicable real property.
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In general, the value of a multifamily or commercial property will
depend on its ability to generate net operating income. The ability of an owner
to finance a multifamily or commercial property will depend, in large part, on
the property's value and ability to generate net operating income.
Unless we state otherwise in the related prospectus supplement, none of
the mortgage loans underlying your offered certificates will be insured or
guaranteed by any governmental entity or private mortgage insurer.
The risks associated with lending on multifamily and commercial
properties are inherently different from those associated with lending on the
security of single-family residential properties. This is because multifamily
rental and commercial real estate lending involves larger loans and, as
described above, repayment is dependent upon the successful operation and value
of the related real estate project.
MANY RISK FACTORS ARE COMMON TO MOST OR ALL MULTIFAMILY AND COMMERCIAL
PROPERTIES. The following factors, among others, will affect the ability of a
multifamily or commercial property to generate net operating income and,
accordingly, its value:
- the age, design and construction quality of the property;
- perceptions regarding the safety, convenience and
attractiveness of the property;
- the characteristics of the neighborhood where the property is
located;
- the proximity and attractiveness of competing properties;
- the existence and construction of competing properties;
- the adequacy of the property's management and maintenance;
- national, regional or local economic conditions, including
plant closings, industry slowdowns and unemployment rates;
- local real estate conditions, including an increase in or
oversupply of comparable commercial or residential space;
- demographic factors;
- customer tastes and preferences;
- retroactive changes in building codes; and
- changes in governmental rules, regulations and fiscal
policies, including environmental legislation.
Particular factors that may adversely affect the ability of a
multifamily or commercial property to generate net operating income include:
- an increase in interest rates, real estate taxes and other
operating expenses;
- an increase in the capital expenditures needed to maintain the
property or make improvements;
- a decline in the financial condition of a major tenant and, in
particular, a sole tenant or anchor tenant;
- an increase in vacancy rates;
- a decline in rental rates as leases are renewed or replaced;
and
- natural disasters and civil disturbances such as earthquakes,
hurricanes, floods, eruptions or riots.
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The volatility of net operating income generated by a multifamily or
commercial property over time will be influenced by many of the foregoing
factors, as well as by:
- the length of tenant leases;
- the creditworthiness of tenants;
- the rental rates at which leases are renewed or replaced;
- the percentage of total property expenses in relation to
revenue;
- the ratio of fixed operating expenses to those that vary with
revenues; and
- the level of capital expenditures required to maintain the
property and to maintain or replace tenants.
Therefore, commercial and multifamily properties with short-term or less
creditworthy sources of revenue and/or relatively high operating costs, such as
those operated as hospitality and self-storage properties, can be expected to
have more volatile cash flows than commercial and multifamily properties with
medium- to long-term leases from creditworthy tenants and/or relatively low
operating costs. A decline in the real estate market will tend to have a more
immediate effect on the net operating income of commercial and multifamily
properties with short-term revenue sources and may lead to higher rates of
delinquency or defaults on the mortgage loans secured by those properties.
THE SUCCESSFUL OPERATION OF A MULTIFAMILY OR COMMERCIAL PROPERTY
DEPENDS ON TENANTS. Generally, multifamily and commercial properties are subject
to leases. The owner of a multifamily or commercial property typically uses
lease or rental payments for the following purposes:
- to pay for maintenance and other operating expenses associated
with the property;
- to fund repairs, replacements and capital improvements at the
property; and
- to service mortgage loans secured by, and any other debt
obligations associated with operating, the property.
Factors that may adversely affect the ability of a multifamily or
commercial property to generate net operating income from lease and rental
payments include:
- an increase in vacancy rates, which may result from tenants
deciding not to renew an existing lease or discontinuing
operations;
- an increase in tenant payment defaults;
- a decline in rental rates as leases are entered into, renewed
or extended at lower rates;
- an increase in the capital expenditures needed to maintain the
property or to make improvements; and
- a decline in the financial condition of a major or sole
tenant.
Various factors that will affect the operation and value of a
commercial property include:
- the business operated by the tenants;
- the creditworthiness of the tenants; and
- the number of tenants.
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DEPENDENCE ON A SINGLE TENANT OR A SMALL NUMBER OF TENANTS MAKES A
PROPERTY RISKIER COLLATERAL. In those cases where an income-producing property
is leased to a single tenant or is primarily leased to one or a small number of
major tenants, a deterioration in the financial condition or a change in the
plan of operations of any of those tenants can have particularly significant
effects on the net operating income generated by the property. If any of those
tenants defaults under or fails to renew its lease, the resulting adverse
financial effect on the operation of the property will be substantially more
severe than would be the case with respect to a property occupied by a large
number of less significant tenants.
An income-producing property operated for retail, office or industrial
purposes also may be adversely affected by a decline in a particular business or
industry if a concentration of tenants at the property is engaged in that
business or industry.
TENANT BANKRUPTCY ADVERSELY AFFECTS PROPERTY PERFORMANCE. The
bankruptcy or insolvency of a major tenant, or a number of smaller tenants, at a
commercial property may adversely affect the income produced by the property.
Under the U.S. Bankruptcy Code, a tenant has the option of assuming or rejecting
any unexpired lease. If the tenant rejects the lease, the landlord's claim for
breach of the lease would be a general unsecured claim against the tenant unless
there is collateral securing the claim. The claim would be limited to:
- the unpaid rent reserved under the lease for the periods prior
to the bankruptcy petition or any earlier surrender of the
leased premises, plus
- an amount, not to exceed three years' rent, equal to the
greater of one year's rent and 15% of the remaining reserved
rent.
THE SUCCESS OF AN INCOME-PRODUCING PROPERTY DEPENDS ON RELETTING VACANT
SPACES. The operations at an income-producing property will be adversely
affected if the owner or property manager is unable to renew leases or relet
space on comparable terms when existing leases expire and/or become defaulted.
Even if vacated space is successfully relet, the costs associated with
reletting, including tenant improvements and leasing commissions in the case of
income-producing properties operated for retail, office or industrial purposes,
can be substantial and could reduce cash flow from the income-producing
properties. Moreover, if a tenant at a income-producing property defaults in its
lease obligations, the landlord may incur substantial costs and experience
significant delays associated with enforcing its rights and protecting its
investment, including costs incurred in renovating and reletting the property.
If an income-producing property has multiple tenants, re-leasing
expenditures may be more frequent than in the case of a property with fewer
tenants, thereby reducing the cash flow generated by the multi-tenanted
property. Multi-tenanted properties may also experience higher continuing
vacancy rates and greater volatility in rental income and expenses.
PROPERTY VALUE MAY BE ADVERSELY AFFECTED EVEN WHEN CURRENT OPERATING
INCOME IS NOT. Various factors may affect the value of multifamily and
commercial properties without affecting their current net operating income,
including:
- changes in interest rates;
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- the availability of refinancing sources;
- changes in governmental regulations, licensing or fiscal
policy;
- changes in zoning or tax laws; and
- potential environmental or other legal liabilities.
PROPERTY MANAGEMENT MAY AFFECT PROPERTY OPERATIONS AND VALUE. The
operation of an income-producing property will depend upon the property
manager's performance and viability. The property manager generally is
responsible for:
- responding to changes in the local market;
- planning and implementing the rental structure, including
staggering durations of leases and establishing levels of rent
payments;
- operating the property and providing building services;
- managing operating expenses; and
- ensuring that maintenance and capital improvements are carried
out in a timely fashion.
Income-producing properties that derive revenues primarily from
short-term rental commitments, such as hospitality or self-storage properties,
generally require more intensive management than properties leased to tenants
under long-term leases.
By controlling costs, providing appropriate and efficient services to
tenants and maintaining improvements in good condition, a property manager can--
- maintain or improve occupancy rates, business and cash flow,
- reduce operating and repair costs, and
- preserve building value.
On the other hand, management errors can, in some cases, impair the long term
viability of an income-producing property.
MAINTAINING A PROPERTY IN GOOD CONDITION IS EXPENSIVE. The owner may be
required to expend a substantial amount to maintain, renovate or refurbish a
commercial or multifamily property. Failure to do so may materially impair the
property's ability to generate cash flow. The effects of poor construction
quality will increase over time in the form of increased maintenance and capital
improvements. Even superior construction will deteriorate over time if
management does not schedule and perform adequate maintenance in a timely
fashion. There can be no assurance that an income-producing property will
generate sufficient cash flow to cover the increased costs of maintenance and
capital improvements in addition to paying debt service on the mortgage loan(s)
that may encumber that property.
COMPETITION WILL ADVERSELY AFFECT THE PROFITABILITY AND VALUE OF AN
INCOME-PRODUCING PROPERTY. Some income-producing properties are located in
highly competitive areas. Comparable income-producing properties located in the
same area compete on the basis of a number of factors including:
- rental rates;
- location;
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- type of business or services and amenities offered; and
- nature and condition of the particular property.
The profitability and value of an income-producing property may be
adversely affected by a comparable property that:
- offers lower rents;
- has lower operating costs;
- offers a more favorable location; or
- offers better facilities.
Costs of renovating, refurbishing or expanding an income-producing
property in order to remain competitive can be substantial.
VARIOUS TYPES OF INCOME-PRODUCING PROPERTIES MAY PRESENT SPECIAL RISKS.
The relative importance of any factor affecting the value or operation of an
income-producing property will depend on the type and use of the property. In
addition, the type and use of a particular income-producing property may present
special risks. For example--
- Health care-related facilities and casinos are subject to
significant governmental regulation of the ownership,
operation, maintenance and/or financing of those properties.
- Multifamily rental properties, manufactured housing
communities and mobile home parks may be subject to rent
control or rent stabilization laws and laws governing
landlord/tenant relationships.
- Hospitality and restaurant properties are often operated under
franchise, management or operating agreements, which may be
terminable by the franchisor or operator. Moreover, the
transferability of a hotel's or restaurant's operating, liquor
and other licenses upon a transfer of the hotel or restaurant
is subject to local law requirements.
- Depending on their location, recreational and resort
properties, properties that provide entertainment services,
hospitality properties, restaurants and taverns,
mini-warehouses and self-storage facilities tend to be
adversely affected more quickly by a general economic downturn
than other types of commercial properties.
- Marinas will be affected by various statutes and government
regulations that govern the use of, and construction on,
rivers, lakes and other waterways.
- Some recreational and hospitality properties may have seasonal
fluctuations and/or may be adversely affected by prolonged
unfavorable weather conditions.
- Churches and other religious facilities may be highly
dependent on donations which are likely to decline as economic
conditions decline.
- Properties used as gas stations, automotive sales and service
centers, dry cleaners, warehouses and industrial facilities
may be more likely to have environmental issues.
Additionally, many types of commercial properties are not readily
convertible to alternative uses if the original use is not successful or may
require significant capital expenditures to effect any conversion to an
alternative use. As a result, the liquidation value of any of those types of
property
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would be substantially less than would otherwise be the case. See "Description
of the Trust Assets--Mortgage Loans--A Discussion of the Various Types of
Multifamily and Commercial Properties that may Secure Mortgage Loans Underlying
a Series of Offered Certificates."
BORROWER CONCENTRATION WITHIN A TRUST EXPOSES INVESTORS TO GREATER RISK OF
DEFAULT AND LOSS
A particular borrower or group of related borrowers may be associated
with multiple real properties securing the mortgage loans underlying a series of
offered certificates. The bankruptcy or insolvency of, or other financial
problems with respect to, that borrower or group of borrowers could have an
adverse effect on--
- the operation of all of the related real properties, and
- the ability of those properties to produce sufficient cash
flow to make required payments on the related mortgage loans.
For example, if a borrower or group of related borrowers that owns or controls
several real properties experiences financial difficulty at one of those
properties, it could defer maintenance at another of those properties in order
to satisfy current expenses with respect to the first property. That borrower or
group of related borrowers could also attempt to avert foreclosure by filing a
bankruptcy petition that might have the effect of interrupting debt service
payments on all the related mortgage loans for an indefinite period. In
addition, multiple real properties owned by the same borrower or related
borrowers are likely to have common management. This would increase the risk
that financial or other difficulties experienced by the property manager could
have a greater impact on the owner of the related loans.
LOAN CONCENTRATION WITHIN A TRUST EXPOSES INVESTORS TO GREATER RISK OF DEFAULT
AND LOSS
Any of the mortgage assets in one of our trusts may be substantially
larger than the other assets in that trust. In general, the inclusion in a trust
of one or more mortgage assets that have outstanding principal balances that are
substantially larger than the other mortgage assets in the trust can result in
losses that are more severe, relative to the size of the related mortgage asset
pool, than would be the case if the total principal balance of that pool were
distributed more evenly.
GEOGRAPHIC CONCENTRATION WITHIN A TRUST EXPOSES INVESTORS TO GREATER RISK OF
DEFAULT AND LOSS
If a material concentration of mortgage loans underlying a series of
offered certificates is secured by real properties in a particular locale, state
or region, then the holders of those certificates will have a greater exposure
to:
- any adverse economic developments that occur in the locale,
state or region where the properties are located;
- changes in the real estate market where the properties are
located;
- changes in governmental rules and fiscal policies in the
governmental jurisdiction where the properties are located;
and
- acts of nature, including floods, tornadoes and earthquakes,
in the areas where properties are located.
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CHANGES IN POOL COMPOSITION WILL CHANGE THE NATURE OF YOUR INVESTMENT
The mortgage loans underlying any series of offered certificates will
amortize at different rates and mature on different dates. In addition, some of
those mortgage loans may be prepaid or liquidated. As a result, the relative
composition of the related mortgage asset pool will change over time.
If you purchase certificates with a pass-through rate that is equal to
or calculated based upon a weighted average of interest rates on the underlying
mortgage loans, your pass-through rate will be affected, and may decline, as the
relative composition of the mortgage pool changes.
In addition, as payments and other collections of principal are
received with respect to the underlying mortgage loans, the remaining mortgage
pool backing your offered certificates may exhibit an increased concentration
with respect to property type, number and affiliation of borrowers and
geographic location.
ADJUSTABLE RATE MORTGAGE LOANS MAY ENTAIL GREATER RISKS OF DEFAULT TO LENDERS
THAN FIXED RATE MORTGAGE LOANS
Some or all of the mortgage loans underlying a series of offered
certificates may provide for adjustments to their respective mortgage interest
rates and corresponding adjustments to their respective periodic debt service
payments. As the periodic debt service payment for any of those mortgage loans
increases, the likelihood that cash flow from the underlying real property will
be insufficient to make that periodic debt service payment and pay operating
expenses also increases.
SUBORDINATE DEBT INCREASES THE LIKELIHOOD THAT A BORROWER WILL DEFAULT ON A
MORTGAGE LOAN UNDERLYING YOUR OFFERED CERTIFICATES
Some or all of the mortgage loans included in one of our trusts may
permit the related borrower to encumber the related real property with
additional secured debt.
Even if a mortgage loan prohibits further encumbrance of the related
real property, a violation of this prohibition may not become evident until the
affected mortgage loan otherwise defaults. Accordingly, a lender, such as one of
our trusts, may not realistically be able to prevent a borrower from incurring
subordinate debt.
The existence of any secured subordinated indebtedness increases the
difficulty of refinancing a mortgage loan at the loan's maturity. In addition,
the related borrower may have difficulty repaying multiple loans. Moreover, the
filing of a petition in bankruptcy by, or on behalf of, a junior lienholder may
stay the senior lienholder from taking action to foreclose out the junior lien.
See "Legal Aspects of Mortgage Loans--Subordinate Financing."
BORROWER BANKRUPTCY PROCEEDINGS CAN DELAY AND IMPAIR RECOVERY ON A MORTGAGE LOAN
UNDERLYING YOUR OFFERED CERTIFICATES
Under the U.S. Bankruptcy Code, the filing of a petition in bankruptcy
by or against a borrower will stay the sale of a real property owned by that
borrower, as well as the commencement or continuation of a foreclosure action.
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In addition, if a court determines that the value of a real property is
less than the principal balance of the mortgage loan it secures, the court may
reduce the amount of secured indebtedness to the then-value of the property.
This would make the lender a general unsecured creditor for the difference
between the then-value of the property and the amount of its outstanding
mortgage indebtedness.
A bankruptcy court also may:
- grant a debtor a reasonable time to cure a payment default on
a mortgage loan;
- reduce monthly payments due under a mortgage loan;
- change the rate of interest due on a mortgage loan; or
- otherwise alter a mortgage loan's repayment schedule.
Furthermore, the borrower, as debtor-in-possession, or its bankruptcy
trustee has special powers to avoid, subordinate or disallow debts. In some
circumstances, the claims of a secured lender, such as one of our trusts, may be
subordinated to financing obtained by a debtor-in-possession subsequent to its
bankruptcy.
Under the U.S. Bankruptcy Code, a lender will be stayed from enforcing
a borrower's assignment of rents and leases. The U.S. Bankruptcy Code also may
interfere with a lender's ability to enforce lockbox requirements. The legal
proceedings necessary to resolve these issues can be time consuming and may
significantly delay the receipt of rents. Rents also may escape an assignment to
the extent they are used by borrower to maintain its property or for other court
authorized expenses.
As a result of the foregoing, the related trust's recovery with respect
to borrowers in bankruptcy proceedings may be significantly delayed, and the
total amount ultimately collected may be substantially less than the amount
owed.
TAXES ON FORECLOSURE PROPERTY WILL REDUCE AMOUNTS AVAILABLE TO MAKE PAYMENTS ON
THE OFFERED CERTIFICATES
One of our trusts may be designated, in whole or in part, as a real
estate mortgage investment conduit for federal income tax purposes. If that
trust acquires a real property through a foreclosure or deed in lieu of
foreclosure, then the related special servicer may be required to retain an
independent contractor to operate and manage the property. Receipt of the
following types of income on that property will subject the trust to federal,
and possibly state or local, tax on that income at the highest marginal
corporate tax rate:
- any net income from that operation and management that does
not consist of qualifying rents from real property within the
meaning of Section 856(d) of the Internal Revenue Code of
1986, and
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- any rental income based on the net profits of a tenant or
sub-tenant or allocable to a service that is non-customary in
the area and for the type of building involved.
These taxes would reduce the net proceeds available for payment with respect to
the related offered certificates.
ENVIRONMENTAL LIABILITIES WILL ADVERSELY AFFECT THE VALUE AND OPERATION OF THE
CONTAMINATED PROPERTY AND MAY DETER A LENDER FROM FORECLOSING
There can be no assurance--
- as to the degree of environmental testing conducted at any of
the real properties securing the mortgage loans that back your
offered certificates;
- that the environmental testing conducted by or on behalf of
the applicable originators or any other parties in connection
with the origination of those mortgage loans or otherwise
identified all adverse environmental conditions and risks at
the related real properties;
- that the results of the environmental testing were accurately
evaluated in all cases;
- that the related borrowers have implemented or will implement
all operations and maintenance plans and other remedial
actions recommended by any environmental consultant that may
have conducted testing at the related real properties; or
- that the recommended action will fully remediate or otherwise
address all the identified adverse environmental conditions
and risks.
Environmental site assessments vary considerably in their content,
quality and cost. Even when adhering to good professional practices,
environmental consultants will sometimes not detect significant environmental
problems because to do an exhaustive environmental assessment would be far too
costly and time-consuming to be practical.
In addition, the current environmental condition of a real property
securing a mortgage loan underlying your offered certificates could be adversely
affected by--
- tenants at the property, such as gasoline stations or dry
cleaners, or
- conditions or operations in the vicinity of the property, such
as leaking underground storage tanks at another property
nearby.
Various environmental laws may make a current or previous owner or
operator of real property liable for the costs of removal or remediation of
hazardous or toxic substances on, under or adjacent to the property. Those laws
often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of the hazardous or toxic substances. For example,
there are laws that impose liability for release of asbestos containing
materials into the air or require the removal or containment of the materials.
The owner's liability for any required remediation generally is unlimited
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and could exceed the value of the property and/or the total assets of the owner.
In addition, the presence of hazardous or toxic substances, or the failure to
remediate the adverse environmental condition, may adversely affect the owner's
or operator's ability to use the affected property. In some states,
contamination of a property may give rise to a lien on the property to ensure
the costs of cleanup. Depending on the state, this lien may have priority over
the lien of an existing mortgage, deed of trust or other security instrument. In
addition, third parties may seek recovery from owners or operators of real
property for personal injury associated with exposure to hazardous substances,
including asbestos and lead-based paint. Persons who arrange for the disposal or
treatment of hazardous or toxic substances may be liable for the costs of
removal or remediation of the substances at the disposal or treatment facility.
The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, as well as other federal and state laws,
provide that a secured lender, such as one of our trusts, may be liable as an
"owner" or "operator" of the real property, regardless of whether the borrower
or a previous owner caused the environmental damage, if--
- agents or employees of the lender are deemed to have
participated in the management of the borrower, or
- the lender actually takes possession of a borrower's property
or control of its day-to-day operations, including through the
appointment of a receiver or foreclosure.
Although recently enacted legislation clarifies the activities in which
a lender may engage without becoming subject to liability under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, and similar federal laws, that legislation has no applicability to
state environmental laws. Moreover, future laws, ordinances or regulations could
impose material environmental liability.
Federal law requires owners of residential housing constructed prior to
1978 to disclose to potential residents or purchasers--
- any condition on the property that causes exposure to
lead-based paint, and
- the potential hazards to pregnant women and young children,
including that the ingestion of lead-based paint chips and/or
the inhalation of dust particles from lead-based paint by
children can cause permanent injury, even at low levels of
exposure.
Property owners may be liable for injuries to their tenants resulting
from exposure under various laws that impose affirmative obligations on property
owners of residential housing containing lead-based paint.
SOME PROVISIONS IN THE MORTGAGE LOANS UNDERLYING YOUR OFFERED CERTIFICATES MAY
BE CHALLENGED AS BEING UNENFORCEABLE
CROSS-COLLATERALIZATION ARRANGEMENTS. It may be possible to challenge
cross-collateralization arrangements involving more than one borrower as a
fraudulent conveyance, even if the borrowers are
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related. If one of those borrowers were to become a debtor in a bankruptcy case,
creditors of the bankrupt party or the representative of the bankruptcy estate
of the bankrupt party could seek to have the bankruptcy court avoid any lien
granted by the bankrupt party to secure repayment of another borrower's loan. In
order to do so, the court would have to determine that--
- the bankrupt party--
1. was insolvent at the time of granting the lien,
2. was rendered insolvent by the granting of the lien,
3. was left with inadequate capital, or
4. was not able to pay its debts as they matured; and
- the bankrupt party did not, when it allowed its property to be
encumbered by a lien securing the other borrower's loan,
receive fair consideration or reasonably equivalent value for
pledging its property for the equal benefit of the other
borrower.
If the court were to conclude that the granting of the lien was an avoidable
fraudulent conveyance, it could nullify the lien or security instrument
effecting the cross-collateralization. The court could also allow the bankrupt
party to recover payments it made under the avoided cross-collateralization.
PREPAYMENT PREMIUMS, FEES AND CHARGES. Under the laws of a number of
states, the enforceability of any mortgage loan provisions that require payment
of a prepayment premium, fee or charge upon an involuntary prepayment, is
unclear. If those provisions were unenforceable, borrowers would have an
incentive to default in order to prepay their loans.
DUE-ON-SALE AND DEBT ACCELERATION CLAUSES. Some or all of the mortgage
loans included in one of our trusts may contain a due-on-sale clause, which
permits the lender, with some exceptions, to accelerate the maturity of the
mortgage loan upon the sale, transfer or conveyance of--
- the related real property, or
- a majority ownership interest in the related borrower.
We anticipate that all of the mortgage loans included in one of our
trusts will contain some form of debt-acceleration clause, which permits the
lender to accelerate the debt upon specified monetary or non-monetary defaults
by the related borrower.
The courts of all states will enforce acceleration clauses in the event
of a material payment default. The equity courts of any state, however, may
refuse to allow the foreclosure of a mortgage, deed of trust or other security
instrument or to permit the acceleration of the indebtedness if:
- the default is deemed to be immaterial,
- the exercise of those remedies would be inequitable or unjust,
or
- the circumstances would render the acceleration
unconscionable.
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ASSIGNMENTS OF LEASES. Some or all of the mortgage loans included in
one of our trusts may be secured by, among other things, an assignment of leases
and rents. Under that document, the related borrower will assign its right,
title and interest as landlord under the leases on the related real property and
the income derived from those leases 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 borrower defaults, the license terminates
and the lender is entitled to collect rents. In some cases, those assignments
may not be perfected as security interests prior to actual possession of the
cash flow. Accordingly, state law may require that the lender take possession of
the property and obtain a judicial appointment of a receiver before becoming
entitled to collect the rents. In addition, the commencement of bankruptcy or
similar proceedings by or with respect to the borrower will adversely affect the
lender's ability to collect the rents. See "Legal Aspects of Mortgage
Loans--Bankruptcy Laws."
DEFEASANCE. A mortgage loan underlying a series of offered certificates
may permit the related borrower, during the periods specified and subject to the
conditions set forth in the loan, to pledge to the holder of the mortgage loan a
specified amount of direct, non-callable United States government securities and
thereby obtain a release of the related mortgaged property. The cash amount
which a Borrower must expend to purchase, or must deliver to a master servicer
in order for the master servicer to purchase, the required United States
government securities may be in excess of the principal balance of the mortgage
loan. A court could interpret that excess amount as a form of prepayment premium
or could take it into account for usury purposes. In some states, some forms of
prepayment premiums are unenforceable. If the payment of that excess amount were
held to be unenforceable, the remaining portion of the cash amount to be
delivered may be insufficient to purchase the requisite amount of United States
government securities.
LACK OF INSURANCE COVERAGE EXPOSES A TRUST TO RISK FOR PARTICULAR SPECIAL HAZARD
LOSSES
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of a property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in the
related policy. Most insurance policies typically do not cover any physical
damage resulting from, among other things:
- war,
- revolution,
- governmental actions,
- floods and other water-related causes,
- earth movement, including earthquakes, landslides and
mudflows,
- wet or dry rot,
- vermin, and
- domestic animals.
Unless the related mortgage loan documents specifically require the
borrower to insure against physical damage arising from these causes, then the
resulting losses may be borne by you as a holder of offered certificates.
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GROUND LEASES CREATE RISKS FOR LENDERS THAT ARE NOT PRESENT WHEN LENDING ON AN
ACTUAL OWNERSHIP INTEREST IN A REAL PROPERTY
In order to secure a mortgage loan, a borrower may grant a lien on its
leasehold interest in a real property as tenant under a ground lease. If the
ground base does not provide for notice to a lender of a default thereunder on
the part of the borrower, together with a reasonable opportunity for the lender
to cure the default, the lender may be unable to prevent termination of the
lease and may lose its collateral.
In addition, upon the bankruptcy of a landlord or a tenant under a
ground lease, the debtor entity has the right to assume or reject the ground
lease. If a debtor landlord rejects the lease, the tenant has the right to
remain in possession of its leased premises at the rent reserved in the lease
for the term, including renewals. If a debtor tenant rejects any or all of its
leases, the tenant's lender may not be able to succeed to the tenant's position
under the lease unless the landlord has specifically granted the lender that
right. If both the landlord and the tenant are involved in bankruptcy
proceedings, the trustee for your offered certificates may be unable to enforce
the bankrupt tenant's obligation to refuse to treat as terminated a ground lease
rejected by a bankrupt landlord. In those circumstances, it is possible that the
trustee could be deprived of its security interest in the leasehold estate,
notwithstanding lender protection provisions contained in the lease or mortgage
loan documents.
CHANGES IN ZONING LAWS MAY ADVERSELY AFFECT THE USE OR VALUE OF A REAL PROPERTY
Due to changes in zoning requirements since construction, an
income-producing property may not comply with current zoning laws, including
density, use, parking and set back requirements. Accordingly, the property may
be a permitted non-conforming structure or the operation of the property may be
a permitted non-conforming use. This means that the owner is not required to
alter the property's structure or use to comply with the new law, but the owner
may be limited in its ability to rebuild the premises "as is" in the event of a
substantial casualty loss. This may adversely affect the cash flow available
following the casualty. If a substantial casualty were to occur, insurance
proceeds may not be sufficient to pay a mortgage loan secured by the property in
full. In addition, if the property were repaired or restored in conformity with
the current law, its value or revenue-producing potential may be less than that
which existed before the casualty.
COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT OF 1990 MAY BE EXPENSIVE
Under the Americans with Disabilities Act of 1990, all public
accommodations are required to meet federal requirements related to access and
use by disabled persons. If a property does not currently comply with that Act,
the property owner may be required to incur significant costs in order to effect
that compliance. This will reduce the amount of cash flow available to cover
other required maintenance and capital improvements and to pay debt service on
the mortgage loan(s) that may encumber that property. There can be no assurance
that the owner will have sufficient funds to cover the costs necessary to comply
with that Act. In addition, noncompliance could result in the imposition of
fines by the federal government or an award or damages to private litigants.
LITIGATION MAY ADVERSELY AFFECT A BORROWER'S ABILITY TO REPAY ITS MORTGAGE LOAN
The owner of a multifamily or commercial property may be a defendant in
a litigation arising out of, among other things, the following:
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- breach of contract involving a tenant, a supplier or other
party;
- negligence resulting in a personal injury, or
- responsibility for an environmental problem.
Litigation will divert the owner's attention from operating its
property. If the litigation were decided adversely to the owner, the award to
the plaintiff may adversely affect the owner's ability to repay a mortgage loan
secured by the property.
RESIDUAL INTERESTS IN A REAL ESTATE MORTGAGE INVESTMENT CONDUIT HAVE ADVERSE TAX
CONSEQUENCES
INCLUSION OF TAXABLE INCOME IN EXCESS OF CASH RECEIVED. If you own a
certificate that is a residual interest in a real estate mortgage investment
conduit for federal income tax purposes, you will have to report on your income
tax return as ordinary income your PRO RATA share of the taxable income of that
REMIC, regardless of the amount or timing of your possible receipt of any cash
on the certificate. As a result, your offered certificate may have phantom
income early in the term of the REMIC because the taxable income from the
certificate may exceed the amount of economic income, if any, attributable to
the certificate. While you will have a corresponding amount of tax losses later
in the term of the REMIC, the present value of the phantom income may
significantly exceed the present value of the tax losses. Therefore, the
after-tax yield on any REMIC residual certificate may be significantly less than
that of a corporate bond or other instrument having similar cash flow
characteristics. In fact, some offered certificates that are residual interests,
may have a negative value.
You have to report your share of the taxable income and net loss of the
REMIC until all the certificates in the related series have a principal balance
of zero. See "Federal Income Tax Consequences--REMICs."
SOME TAXABLE INCOME OF A RESIDUAL INTEREST CAN NOT BE OFFSET UNDER THE
INTERNAL REVENUE CODE OF 1986. A portion of the taxable income from a REMIC
residual certificate may be treated as excess inclusions under the Internal
Revenue Code of 1986. You will have to pay tax on the excess inclusions
regardless of whether you have other credits, deductions or losses. In
particular, the tax on excess inclusion:
- generally will not be reduced by losses from other activities,
- for a tax-exempt holder, will be treated as unrelated business
taxable income, and
- for a foreign holder, will not qualify for any exemption from
withholding tax.
SOME ENTITIES SHOULD NOT INVEST IN REMIC RESIDUAL CERTIFICATES. The
fees and non-interest expenses of a REMIC will be allocated PRO RATA to
certificates that are residual interests in the REMIC. However, individuals will
only be able to deduct these expenses as miscellaneous itemized deductions,
which are subject to numerous restrictions and limitations under the Internal
Revenue Code of 1986. Therefore, the certificates that are residual interests
generally are not appropriate investments for:
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- individuals,
- estates,
- trusts beneficially owned by any individual or estate, and
- pass-through entities having any individual, estate or trust
as a shareholder, member or partner.
In addition, the REMIC residual certificates will be subject to
numerous transfer restrictions. These restrictions will reduce your ability to
liquidate a REMIC residual certificate. For example, unless we indicate
otherwise in the related prospectus supplement, you will not be able to transfer
a REMIC residual certificate to a foreign person under the Internal Revenue Code
of 1986.
See "Federal Income Tax Consequences--REMICs--Taxation of Owners of
REMIC Residual Certificates."
PROBLEMS WITH BOOK-ENTRY REGISTRATION
Your offered certificates may be issued in book-entry form through the
facilities of the Depository Trust Company. As a result--
- you will be able to exercise your rights as a
certificateholder only indirectly through the Depository Trust
Company and its participating organizations;
- you may have only limited access to information regarding your
offered certificates;
- you may suffer delays in the receipt of payments on your
offered certificates; and
- your ability to pledge or otherwise take action with respect
to your offered certificates may be limited due to the lack of
a physical certificate evidencing your ownership of those
certificates.
See "Description of the Certificates--Book-Entry Registration and
Definitive Certificates."
POTENTIAL CONFLICTS OF INTEREST CAN AFFECT A PERSON'S PERFORMANCE
The master servicer or special servicer for one of our trusts, or any
of their respective affiliates, may purchase certificates evidencing interests
in that trust.
In addition, the master servicer or special servicer for one of our
trusts, or any of their respective affiliates, may have interests in, or other
financial relationships with, borrowers under the related mortgage loans.
In servicing the mortgage loans in any of our trusts, the related
master servicer and special servicer will each be required to observe the terms
of the governing document(s) for the related series of offered certificates and,
in particular, to act in accordance with the servicing standard described in the
related prospectus supplement. You should consider, however, that either of
these parties, if it or an affiliate owns certificates, or has financial
interests in or other financial dealings with any of the related borrowers, may
have interests when dealing with the mortgage loans underlying your offered
certificates that are in conflict with your interests. For example, if the
related special servicer owns any certificates,
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it could seek to mitigate the potential loss on its certificates from a troubled
mortgage loan by delaying enforcement in the hope of realizing greater proceeds
in the future. However, this action by a special servicer could result a lower
recovery to the related trust than would have been the case if the special
servicer had not delayed in taking enforcement action.
Furthermore, the master servicer or special servicer for any of our
trusts may service existing and new loans for third parties, including
portfolios of loans similar to the mortgage loans included in that trust. The
properties securing these other loans may be in the same markets as and compete
with the properties securing mortgage loans in our trust. Accordingly, that
master servicer or special servicer may be acting on behalf of parties with
conflicting interests.
THE TRANSITION FROM THE YEAR 1999 TO THE YEAR 2000 MAY DISRUPT THE ABILITY OF
COMPUTERIZED SYSTEMS TO PROCESS INFORMATION.
The collection of payments on the mortgage assets backing your offered
certificates, the servicing and administration of those mortgage assets and the
payments on your offered certificates are highly dependent upon computer systems
of the related master servicer, manager, special servicer, trustee, borrowers
and other third parties.
We will inquire from each of the parties to the governing document(s)
for a series of offered certificates whether and how the transition from 1999 to
2000 has affected their computer systems. We also will obtain assurances from
these parties that they are taking the necessary steps to cure any problems
their computer systems may have with the manipulation or calculation of dates
after December 1, 1999. Notwithstanding those inquiries and assurances,
unforeseen problems in this regard could still occur.
CAPITALIZED TERMS USED IN THIS PROSPECTUS
From time to time we use capitalized terms in this prospectus. Each
of those capitalized terms will have the meaning assigned to it in the
"Glossary" attached to this prospectus.
DESCRIPTION OF THE TRUST ASSETS
GENERAL
We will be responsible for establishing the trust underlying each
series of offered certificates. The assets of the trust will primarily consist
of:
- various types of multifamily and/or commercial mortgage loans;
- mortgage participations, pass-through certificates,
collateralized mortgage obligations or other mortgage-backed
securities that directly or indirectly evidence interests in,
or are secured by pledges of, one or more of various types of
multifamily and/or commercial mortgage loans; or
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- a combination of mortgage loans and mortgage-backed securities
of the types described above.
We do not originate mortgage loans. Accordingly, we must acquire each
of the mortgage loans to be included in one of our trusts from the originator or
a subsequent assignee. In some cases, that originator or subsequent assignee
will be one of our affiliates.
Unless we indicate otherwise in the related prospectus supplement, we
will acquire, directly or through one of our affiliates, in the secondary
market, any mortgage-backed security to be included in one of our trusts.
Neither we nor any of our affiliates will guarantee any of the mortgage
assets included in one of our trusts. Furthermore, unless we indicate otherwise
in the related prospectus supplement, no governmental agency or instrumentality
will guarantee or insure any of those mortgage assets.
MORTGAGE LOANS
GENERAL. Each mortgage loan underlying the offered certificates will
constitute the obligation of one or more persons to repay a debt. That
obligation will be evidenced by a promissory note or bond. In addition, that
obligation will be secured by a mortgage, deed of trust or other security
instrument that creates a first or junior lien on, or security interest in, an
interest in one or more of the following types of real property:
- rental or cooperatively-owned buildings with multiple dwelling
units;
- retail properties related to the sale of consumer goods and
other products to the general public, such as shopping
centers, malls, factory outlet centers, automotive sales
centers, department stores and other retail stores, grocery
stores, specialty shops, convenience stores and gas stations;
- retail properties related to providing entertainment,
recreational and personal services to the general public, such
as movie theaters, fitness centers, bowling alleys, salons,
dry cleaners and automotive service centers;
- office properties;
- hospitality properties, such as hotels, motels and other
lodging facilities;
- casino properties;
- health care-related properties, such as hospitals, skilled
nursing facilities, nursing homes, congregate care facilities
and, in some cases, assisted living centers and senior
housing;
- industrial properties;
- warehouse facilities, mini-warehouse facilities and
self-storage facilities;
- restaurants, taverns and other establishments involved in the
food and beverage industry;
- manufactured housing communities, mobile home parks and
recreational vehicle parks;
- recreational and resort properties, such as recreational
vehicle parks, golf courses, marinas, ski resorts and
amusement parks;
- arenas and stadiums;
- churches and other religious facilities;
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- parking lots and garages;
- mixed use properties;
- other income-producing properties; and
- unimproved land.
The real property interests that may be encumbered in order to secure a
mortgage loan underlying your offered certificates, include--
- a fee interest or estate, which consists of ownership of the
property for an indefinite period,
- an estate for years, which consists of ownership of the
property for a specified period of years,
- a leasehold interest or estate, which consists of a right to
occupy and use the property for a specified period of years,
subject to the terms and conditions of a lease,
- shares in a cooperative corporation which owns the property,
or
- any other real estate interest under applicable local law.
Any of these real property interests may be subject to deed restrictions,
easements, rights of way and other matters of public record with respect to the
related property. In addition, the use of, and improvements that may be
constructed on, any particular real property will, in most cases, be subject to
zoning laws and other legal restrictions.
Most, if not all, of the mortgage loans underlying a series of offered
certificates will be secured by liens on real properties located in the United
States, its territories and possessions. However, some of those mortgage loans
may be secured by liens on real properties located outside the United States,
its territories and possessions, provided that foreign mortgage loans do not
represent more than 10% of the related mortgage asset pool, by balance.
If we so indicate in the related prospectus supplement, one or more of
the mortgage loans underlying a series of offered certificates may be secured by
a junior lien on the related real property. However, the loan or loans secured
by the more senior liens on that property may not be included in the related
trust. The primary risk to the holder of a mortgage loan secured by a junior
lien on a real property is the possibility that the foreclosure proceeds
remaining after payment of the loans secured by more senior liens on that
property will be insufficient to pay the junior loan in full. In a foreclosure
proceeding, the sale proceeds are applied--
- FIRST, to the payment of court costs and fees in connection
with the foreclosure,
- SECOND, to the payment of real estate taxes, and
- THIRD, to the payment of any and all principal, interest,
prepayment or acceleration penalties, and other amounts owing
to the holder of the senior loans.
The claims of the holders of the senior loans must be satisfied in full before
the holder of the junior loan receives any payments with respect to the junior
loan. If a lender forecloses on a junior loan, it does so subject to any related
senior loans.
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If we so indicate in the related prospectus supplement, the mortgage
loans underlying a series of offered certificates may be delinquent as of the
date the certificates are initially issued. In those cases, we will describe in
the related prospectus supplement--
- the period of the delinquency,
- any forbearance arrangement then in effect,
- the condition of the related real property, and
- the ability of the related real property to generate income to
service the mortgage debt.
We will not, however, transfer any mortgage loan to a trust if we know that the
mortgage loan is, at the time of transfer, more than 90 days delinquent with
respect to any scheduled payment of principal or interest or in foreclosure.
A DISCUSSION OF THE VARIOUS TYPES OF MULTIFAMILY AND COMMERCIAL
PROPERTIES THAT MAY SECURE MORTGAGE LOANS UNDERLYING A SERIES OF OFFERED
CERTIFICATES. The mortgage loans underlying a series of offered certificates may
be secured by numerous types of multifamily and commercial properties. As we
discuss below under "--Mortgage Loans--Default and Loss Considerations with
Respect to Commercial and Multifamily Mortgage Loans," the adequacy of an
income-producing property as security for a mortgage loan depends in large part
on its value and ability to generate net operating income. Set forth below is a
discussion of some of the various factors that may affect the value and
operations of the indicated types of multifamily and commercial properties.
MULTIFAMILY RENTAL PROPERTIES. Factors affecting the value and
operation of a multifamily rental property include:
- the physical attributes of the property, such as its age,
appearance, amenities and construction quality;
- the types of services offered at the property;
- the location of the property;
- the characteristics of the surrounding neighborhood, which may
change over time;
- the rents charged for dwelling units at the property relative
to the rents charged for comparable units at competing
properties;
- the ability of management to provide adequate maintenance and
insurance;
- the property's reputation;
- the level of mortgage interest rates, which may encourage
tenants to purchase rather than lease housing;
- the existence or construction of competing or alternative
residential properties, including other apartment buildings
and complexes, manufactured housing communities, mobile home
parks and single-family housing;
- the ability of management to respond to competition;
- the tenant mix and whether the property is primarily occupied
by workers from a particular company or type of business,
personnel from a local military base or students;
- adverse local, regional or national economic conditions, which
may limit the amount that may be charged for rents and may
result in a reduction in timely rent payments or a reduction
in occupancy levels;
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- state and local regulations, which may affect the property
owner's ability to increase rent to the market rent for an
equivalent apartment;
- the extent to which the property is subject to land use
restrictive covenants or contractual covenants that require
that units be rented to low income tenants;
- the extent to which the cost of operating the property,
including the cost of utilities and the cost of required
capital expenditures, may increase; and
- the extent to which increases in operating costs may be passed
through to tenants.
Because units in a multifamily rental property are leased to
individuals, usually for no more than a year, the property is likely to respond
relatively quickly to a downturn in the local economy or to the closing of a
major employer in the area.
Some states regulate the relationship of an owner and its tenants at a
multifamily rental property. Among other things, these states may--
- require written leases;
- require good cause for eviction;
- require disclosure of fees;
- prohibit unreasonable rules;
- prohibit retaliatory evictions;
- prohibit restrictions on a resident's choice of unit vendors;
- limit the bases on which a landlord may increase rent; or
- prohibit a landlord from terminating a tenancy solely by
reason of the sale of the owner's building.
Apartment building owners have been the subject of suits under state
Unfair and Deceptive Practices Acts and other general consumer protection
statutes for coercive, abusive or unconscionable leasing and sales practices.
Some counties and municipalities also impose rent control regulations
on apartment buildings. These regulations may limit rent increases to--
- fixed percentages,
- percentages of increases in the consumer price index,
- increases set or approved by a governmental agency, or
- increases determined through mediation or binding arbitration.
In many cases, the rent control laws do not provide for decontrol of
rental rates upon vacancy of individual units. Any limitations on a landlord's
ability to raise rents at a multifamily rental property may impair the
landlord's ability to repay a mortgage loan secured by the property or to meet
operating costs.
Some multifamily rental properties are subject to land use restrictive
covenants or contractual covenants in favor of federal or state housing
agencies. These covenants generally require that a minimum number or percentage
of units be rented to tenants who have incomes that are substantially lower than
median incomes in the area or region. These covenants may limit the potential
rental rates that may be charged at a multifamily rental property, the potential
tenant base for the property or both.
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An owner may subject a multifamily rental property to these covenants in
exchange for tax credits or rent subsidies. When the credits or subsidies cease,
net operating income will decline.
Some mortgage loans underlying the offered certificates will be secured
by--
- the related borrower's interest in multiple units in a
residential condominium project, and
- the related voting rights in the owners' association for the
project.
Due to the nature of condominiums, a default on any of those mortgage loans will
not allow the related special servicer the same flexibility in realizing on the
real property collateral as is generally available with respect to multifamily
rental properties that are not condominiums. The rights of other unit owners,
the governing documents of the owners' association and the state and local laws
applicable to condominiums must be considered and respected. Consequently,
servicing and realizing upon the collateral for those mortgage loans could
subject the related trust to greater delay, expense and risk than a loan secured
by a multifamily rental property that is not a condominium.
COOPERATIVELY-OWNED APARTMENT BUILDINGS. Some multifamily properties
are owned or leased by cooperative corporations. In general, each shareholder in
the corporation is entitled to occupy a particular apartment unit under a
long-term proprietary lease or occupancy agreement.
A tenant/shareholder of a cooperative corporation must make a monthly
maintenance payment to the corporation. The monthly maintenance payment
represents a tenant/shareholder's PRO RATA share of the corporation's--
- mortgage loan payments,
- real property taxes,
- maintenance expenses, and
- other capital and ordinary expenses of the property.
These monthly maintenance payments are in addition to any payments of principal
and interest the tenant/shareholder must make on any loans of the
tenant/shareholder secured by its shares in the corporation.
A cooperative corporation is directly responsible for building
maintenance and payment of real estate taxes and hazard and liability insurance
premiums. A cooperative corporation's ability to meet debt service obligations
on a mortgage loan secured by, and to pay all other operating expenses of, the
cooperatively owned property depends primarily upon the receipt of--
- maintenance payments from the tenant/shareholders, and
- any rental income from units or commercial space that the
cooperative corporation might control.
A cooperative corporation may have to impose special assessments on the
tenant/shareholders in order to pay unanticipated expenditures. Accordingly, a
cooperative corporation is highly dependent on the financial well being of its
tenant/shareholders. A cooperative corporation's ability to pay the amount
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of any balloon payment due at the maturity of a mortgage loan secured by the
cooperatively owned property depends primarily on its ability to refinance the
property.
In a typical cooperative conversion plan, the owner of a rental
apartment building contracts to sell the building to a newly formed cooperative
corporation. Shares are allocated to each apartment unit by the owner or
sponsor. The current tenants have a specified period to subscribe at prices
discounted from the prices to be offered to the public after that period. As
part of the consideration for the sale, the owner or sponsor receives all the
unsold shares of the cooperative corporation. In general the sponsor controls
the corporation's board of directors and management for a limited period of
time. If the sponsor holds the shares allocated to a large number of apartment
units, the lender on a mortgage loan secured by a cooperatively owned property
may be adversely affected by a decline in the creditworthiness of the sponsor.
Many cooperative conversion plans are non-eviction plans. Under a
non-eviction plan, a tenant at the time of conversion who chooses not to
purchase shares is entitled to reside in its apartment unit as a subtenant from
the owner of the shares allocated to that unit. Any applicable rent control or
rent stabilization laws would continue to be applicable to the subtenancy. In
addition, the subtenant may be entitled to renew its lease for an indefinite
number of years with continued protection from rent increases above those
permitted by any applicable rent control and rent stabilization laws. The
owner/shareholder is responsible for the maintenance payments to the cooperative
corporation without regard to whether it receives rent from the subtenant or
whether the rent payments are lower than maintenance payments on the unit.
Newly-formed cooperative corporations typically have the greatest concentration
of non-tenant/shareholders.
RETAIL PROPERTIES. The term "retail property" encompasses a broad range
of properties at which businesses sell consumer goods and other products and
provide various entertainment, recreational or personal services to the general
public. Some examples of retail properties include:
- shopping centers
- factory outlet centers
- malls
- automotive sales and service centers
- consumer oriented businesses
- department stores
- grocery stores
- convenience stores
- specialty shops
- gas stations
- movie theaters
- fitness centers
- bowling alleys
- salons
- dry cleaners
Unless owner occupied, retail properties generally derive all or a
substantial percentage of their income from lease payments from commercial
tenants. Therefore, it is important for the owner of a
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retail property to attract and keep tenants, particularly significant tenants,
that are able to meet their lease obligations. In order to attract tenants, the
owner of a retail property may be required--
- to lower rents;
- to grant a potential tenant a free rent or reduced rent
period;
- to improve the condition of the property generally; or
- to make at its own expense, or grant a rent abatement to
cover, tenant improvements for a potential tenant.
A prospective tenant will also be interested in the number and type of
customers that it will be able to attract at a particular retail property. The
ability of a tenant at a particular retail property to attract customers will be
affected by a number of factors related to the property and the surrounding
area, including--
- competition from other retail properties;
- perceptions regarding the safety, convenience and
attractiveness of the property;
- perceptions regarding the safety of the surrounding area;
- demographics of the surrounding area;
- the strength and stability of the local, regional and national
economies;
- traffic patterns and access to major thoroughfares;
- the visibility of the property;
- availability of parking;
- the particular mixture of the goods and services offered at
the property;
- customer tastes, preferences and spending patterns; and
- the drawing power of other tenants.
The success of a retail property is often dependent on the success of
its tenants' businesses. A significant component of the total rent paid by
tenants of retail properties is often tied to a percentage of gross sales or
revenues. Declines in sales or revenues of the tenants will likely cause a
corresponding decline in percentage rents and/or impair the tenants' ability to
pay their rent or other occupancy costs. A default by a tenant under its lease
could result in delays and costs in enforcing the landlord's rights. Retail
properties would be directly and adversely affected by a decline in the local
economy and reduced consumer spending.
Repayment of a mortgage loan secured by a retail property will be
affected by the expiration of space leases at the property and the ability of
the borrower to renew or relet the space on comparable terms. Even if vacant
space is successfully relet, the costs associated with reletting, including
tenant improvements, leasing commissions and free rent, may be substantial and
could reduce cash flow from a retail property.
The presence or absence of an anchor tenant in a multi-tenanted retail
property can be important. Anchor tenants play a key role in generating customer
traffic and making the center desirable for other tenants. An anchor tenant is,
in general, a retail tenant whose space is substantially larger in size than
that of other tenants at the same retail property and whose operation is vital
in attracting customers to the property. At some retail properties, the anchor
tenant owns the space it occupies. In those cases where the property owner does
not control the space occupied by the anchor tenant, the property owner may not
be able to take actions with respect to the space that it otherwise
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typically would, such as granting concessions to retain an anchor tenant or
removing an ineffective anchor tenant. In some cases, an anchor tenant may cease
to operate at the property, thereby leaving its space unoccupied even though it
continues to own or pay rent on the vacant space. If an anchor tenant ceases
operations at a retail property, other tenants at the property may be entitled
to terminate their leases prior to the scheduled termination date or to pay rent
at a reduced rate for the remaining term of the lease.
Various factors will adversely affect the economic performance of an
anchored retail property, including:
- an anchor tenant's failure to renew its lease;
- termination of an anchor tenant's lease;
- the bankruptcy or economic decline of an anchor tenant or a
self-owned anchor;
- the cessation of the business of a self-owned anchor or of an
anchor tenant, notwithstanding its continued ownership of the
previously occupied space or its continued payment of rent, as
the case may be; or
- a loss of an anchor tenant's ability to attract shoppers.
Retail properties may also face competition from sources outside a
given real estate market or with lower operating costs. For example, all of the
following compete with more traditional department stores and specialty shops
for consumer dollars:
- factory outlet centers;
- discount shopping centers and clubs;
- catalogue retailers;
- television shopping networks and programs;
- internet web sites; and
- telemarketing.
Similarly, home movie rentals and pay-per-view movies provide alternate
sources of entertainment to movie theaters. Continued growth of these
alternative retail outlets and entertainment sources, which are often
characterized by lower operating costs, could adversely affect the rents
collectible at retail properties.
Gas stations, automotive sales and service centers and dry cleaners
also pose unique environmental risks because of the nature of their businesses
and the types of products used or sold in those businesses.
OFFICE PROPERTIES. Factors affecting the value and operation of an
office property include:
- the number and quality of the tenants, particularly
significant tenants, at the property;
- the physical attributes of the building in relation to
competing buildings;
- the location of the property 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;
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- 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 or property owners by
cities or suburbs adjacent to or near where the building is
located;
- local competitive conditions, such as the supply of office
space or the existence or construction of new competitive
office buildings;
- the quality and philosophy of building management;
- access to mass transportation; and
- changes in zoning laws.
Office properties may be adversely affected by an economic decline in
the business operated by their tenants. The risk associated with that economic
decline is increased if revenue is dependent on a single tenant or if there is a
significant concentration of tenants in a particular business or industry.
Office properties are also subject to competition with other office
properties in the same market. Competitive factors affecting an office property
include:
- rental rates;
- the building's age, condition and design, including floor
sizes and layout;
- access to public transportation and availability of parking;
and
- amenities offered to its tenants, including sophisticated
building systems, such as fiber optic cables, satellite
communications or other base building technological features.
The cost of refitting office space for a new tenant is often higher
than for other property types.
The success of an office property also depends on the local economy.
Factors influencing a company's decision to locate in a given area include:
- the cost and quality of labor;
- tax incentives; and
- quality of life matters, such as schools and cultural
amenities.
The strength and stability of the local or regional economy will affect
an office property's ability to attract stable tenants on a consistent basis. A
central business district may have a substantially different economy from that
of a suburb.
HOSPITALITY PROPERTIES. Hospitality properties may involve different
types of hotels and motels, including:
- full service hotels;
- resort hotels with many amenities;
- limited service hotels;
- hotels and motels associated with national or regional
franchise chains;
- hotels that are not affiliated with any franchise chain but
may have their own brand identity; and
- other lodging facilities.
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Factors affecting the economic performance of a hospitality property
include:
- the location of the property and its proximity to major
population centers or attractions;
- the seasonal nature of business at the property;
- the level of room rates relative to those charged by
competitors;
- quality and perception of the franchise affiliation;
- economic conditions, either local, regional or national, which
may limit the amount that can be charged for a room and may
result in a reduction in occupancy levels;
- the existence or construction of competing hospitality
properties;
- nature and quality of the services and facilities;
- financial strength and capabilities of the owner and operator;
- the need for continuing expenditures for modernizing,
refurbishing and maintaining existing facilities;
- increases in operating costs, which may not be offset by
increased room rates;
- the property's dependence on business and commercial travelers
and tourism; and
- changes in travel patterns caused by changes in access, energy
prices, labor strikes, relocation of highways, the
reconstruction of additional highways or other factors.
Because limited service hotels and motels are relatively quick and
inexpensive to construct and may quickly reflect a positive value, an
over-building of these hotels and motels could occur in any given region, which
would likely adversely affect occupancy and daily room rates. Further, because
rooms at hospitality properties are generally rented for short periods of time,
hospitality properties tend to be more sensitive to adverse economic conditions
and competition than many other types of commercial properties. Additionally,
the revenues of some hospitality properties, particularly those located in
regions whose economies depend upon tourism, may be highly seasonal in nature.
Hospitality properties may be operated under franchise agreements. The
continuation of a franchise is typically subject to specified operating
standards and other terms and conditions. The franchisor periodically inspects
its licensed properties to confirm adherence to its operating standards. The
failure of the hospitality property to maintain those standards or adhere to
those other terms and conditions could result in the loss or cancellation of the
franchise license. It is possible that the franchisor could condition the
continuation of a franchise license on the completion of capital improvements or
the making of capital expenditures that the owner of the hospitality property
determines are too expensive or are otherwise unwarranted in light of the
operating results or prospects of the property. In that event, the owner of the
hospitality property may elect to allow the franchise license to lapse. In any
case, if the franchise is terminated, the owner of the hospitality property may
seek to obtain a suitable replacement franchise or to operate property
independently of a franchise license. The loss of a franchise license could have
a material adverse effect upon the operations or value of the hospitality
property because of the loss of associated name recognition, marketing support
and centralized reservation systems provided by the franchisor.
The viability of any hospitality property that is a franchise of a
national or a regional hotel or motel chain is dependent upon:
- the continued existence and financial strength of the
franchisor;
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- 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.
The consent of the franchisor would be required for the continued use of the
franchise license by the hospitality property following a foreclosure.
Conversely, a lender may be unable to remove a franchisor that it desires to
replace following a foreclosure. Further, in the event of a foreclosure on a
hospitality property, the lender or other purchaser of the hospitality property
may not be entitled to the rights under any associated liquor license. That
party would be required to apply in its own right for a new liquor license.
There can be no assurance that a new license could be obtained or that it could
be obtained promptly.
CASINO PROPERTIES. Factors affecting the economic performance of a
casino property include:
- location, including proximity to or easy access from major
population centers;
- appearance;
- economic conditions, either local, regional or national, which
may limit the amount of disposable income that potential
patrons may have for gambling;
- the existence or construction of competing casinos;
- dependence on tourism; and
- local or state governmental regulation.
Competition among major casinos may involve attracting patrons by--
- providing alternate forms of entertainment, such as performers
and sporting events, and
- offering low-priced or free food and lodging.
Casino owners may expend substantial sums to modernize, refurbish and
maintain existing facilities.
Because of their dependence on disposable income of patrons, casino
properties are likely to respond quickly to a downturn in the economy.
To avoid criminal influence, the ownership and operation of casino
properties is often subject to local or state governmental regulation. A
government agency or authority may have jurisdiction over or influence with
respect to the foreclosure of a casino property or the bankruptcy of its owner
or operator. In some jurisdictions, it may be necessary to receive governmental
approval before foreclosing, thereby resulting in substantial delays to a
lender. Gaming licenses are not transferable, including in connection with a
foreclosure. There can be no assurance that a lender or another purchaser in
foreclosure or otherwise will be able to obtain the requisite approvals to
continue operating the foreclosed property as a casino.
Any given state or municipality that currently allows legalized
gambling could pass legislation banning it.
The loss of a gaming license for any reason would have a material
adverse effect on the value of a casino property.
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HEALTH CARE-RELATED PROPERTIES. Health-care related properties include
- hospitals;
- skilled nursing facilities;
- nursing homes;
- congregate care facilities; and
- in some cases, assisted living centers and housing for
seniors.
Health care-related facilities, particularly nursing homes, may receive
a substantial portion of their revenues from government reimbursement programs,
primarily Medicaid and Medicare. Medicaid and Medicare are subject to
- statutory and regulatory changes;
- retroactive rate adjustments;
- administrative rulings;
- policy interpretations;
- delays by fiscal intermediaries; and
- government funding restrictions.
All of the foregoing can adversely affect revenues from the operation a health
care-related facility. Moreover, governmental payors have employed
cost-containment measures that limit payments to health care providers. In
addition, there are currently under consideration various proposals for national
health care relief that could further limit these payments.
Providers of long-term nursing care and other medical services are
highly regulated by federal, state and local law. They are subject to numerous
factors which can increase the cost of operation, limit growth and, in extreme
cases, require or result in suspension or cessation of operations, including:
- federal and state licensing requirements;
- facility inspections;
- rate setting;
- reimbursement policies; and
- laws relating to the adequacy of medical care, distribution of
pharmaceuticals, use of equipment, personnel operating
policies and maintenance of and additions to facilities and
services.
Under applicable federal and state laws and regulations, Medicare and
Medicaid reimbursements generally may not be made to any person other than the
provider who actually furnished the related material goods and services.
Accordingly, in the event of foreclosure on a health care-related facility,
neither a lender nor other subsequent lessee or operator of the property would
generally be entitled to obtain from federal or state governments any
outstanding reimbursement payments relating to services furnished at the
property prior to foreclosure. Furthermore, in the event of foreclosure, there
can be no assurance that a lender or other purchaser in a foreclosure sale would
be entitled to the rights under any required licenses and regulatory approvals.
The lender or other purchaser may have to apply in its own right for those
licenses and approvals. There can be no assurance that a new license could be
obtained or that a new approval would be granted.
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Health care-related facilities are generally special purpose properties
that could not be readily converted to general residential, retail or office
use. This will adversely affect their liquidation value. Furthermore, transfers
of health care-related facilities are subject to regulatory approvals under
state, and in some cases federal, law not required for transfers of most other
types of commercial properties.
INDUSTRIAL PROPERTIES. Industrial properties may be adversely affected
by reduced demand for industrial space occasioned by a decline in a particular
industry segment and/or by a general slowdown in the economy. In addition, an
industrial property that suited the particular needs of its original tenant may
be difficult to relet to another tenant or may become functionally obsolete
relative to newer properties.
The value and operation of an industrial property depends on:
- location of the property, the desirability of which in a
particular instance may depend on--
1. availability of labor services,
2. proximity to supply sources and customers, and
3. accessibility to various modes of transportation and
shipping, including railways, roadways, airline
terminals and ports;
- building design of the property, the desirability of which in
a particular instance may depend on--
1. ceiling heights,
2. column spacing,
3. number and depth of loading bays,
4. divisibility,
5. floor loading capacities,
6. truck turning radius,
7. overall functionality, and
8. adaptability of the property, because industrial
tenants often need space that is acceptable for
highly specialized activities; and
- the quality and creditworthiness of individual tenants,
because industrial properties frequently have higher tenant
concentrations.
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Industrial properties are generally special purpose properties that
could not be readily converted to general residential, retail or office use.
This will adversely affect their liquidation value.
WAREHOUSE, MINI-WAREHOUSE AND SELF-STORAGE FACILITIES. Warehouse,
mini-warehouse and self-storage properties are considered vulnerable to
competition because both acquisition costs and break-even occupancy are
relatively low. In addition, it would require substantial capital expenditures
to convert a warehouse, mini-warehouse or self-storage property to an
alternative use. This will materially impair the liquidation value of the
property if its operation for storage purposes becomes unprofitable due to
decreased demand, competition, age of improvements or other factors.
Successful operation of a warehouse, mini-warehouse or self-store
property depends on--
- building design;
- location and visibility;
- tenant privacy;
- efficient access to the property;
- proximity to potential users, including apartment complexes or
commercial users;
- services provided at the property, such as security;
- age and appearance of the improvements; and
- quality of management.
RESTAURANTS AND TAVERNS. Factors affecting the economic viability of
individual restaurants, taverns and other establishments that are part of the
food and beverage service industry include:
- competition from facilities having businesses similar to a
particular restaurant or tavern;
- perceptions by prospective customers of safety, convenience,
services and attractiveness;
- the cost, quality and availability of food and beverage
products;
- negative publicity, resulting from instances of food
contamination, food-borne illness and similar events;
- changes in demographics, consumer habits and traffic patterns;
- the ability to provide or contract for capable management; and
- retroactive changes to building codes, similar ordinances and
other legal requirements.
Adverse economic conditions, whether local, regional or national, may
limit the amount that may be charged for food and beverages and the extent to
which potential customers dine out. Because of the nature of the business,
restaurants and taverns tend to respond to adverse economic conditions more
quickly than do many other types of commercial properties. Furthermore, the
transferability of any operating, liquor and other licenses to an entity
acquiring a bar or restaurant, either through purchase or foreclosure, is
subject to local law requirements.
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The food and beverage service industry is highly competitive. The
principal means of competition are--
- segment,
- product,
- price,
- value,
- quality,
- service,
- convenience,
- location, and
- the nature and condition of the restaurant facility.
A restaurant or tavern operator competes with the operators of
comparable establishments in the area in which its restaurant or tavern is
located. Other restaurants could have--
- lower operating costs,
- more favorable locations,
- more effective marketing,
- more efficient operations, or
- better facilities.
The location and condition of a particular restaurant or tavern will
affect the number of customers and, to an extent, the prices that may be
charged. The characteristics of an area or neighborhood in which a restaurant or
tavern is located may change over time or in relation to competing facilities.
Also, the cleanliness and maintenance at a restaurant or tavern will affect its
appeal to customers. In the case of a regionally- or nationally-known chain
restaurant, there may be costly expenditures for renovation, refurbishment or
expansion, regardless of its condition.
Factors affecting the success of a regionally- or nationally-known
chain restaurant include:
- actions and omissions of any franchisor, including management
practices that--
1. adversely affect the nature of the business, or
2. require renovation, refurbishment, expansion or other
expenditures;
- the degree of support provided or arranged by the franchisor,
including its franchisee organizations and third-party
providers of products or services; and
- the bankruptcy or business discontinuation of the franchisor
or any of its franchisee organizations or third-party
providers.
Chain restaurants may be operated under franchise agreements. Those
agreements typically do not contain provisions protective of lenders. A
borrower's rights as franchisee typically may be terminated without informing
the lender, and the borrower may be precluded from competing with the
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franchisor upon termination. In addition, a lender that acquires title to a
restaurant site through foreclosure or similar proceedings may be restricted in
the use of the site or may be unable to succeed to the rights of the franchisee
under the related franchise agreement. The transferability of a franchise may be
subject to other restrictions. Also, federal and state franchise regulations may
impose additional risk, including the risk that the transfer of a franchise
acquired through foreclosure or similar proceedings may require registration
with governmental authorities or disclosure to prospective transferees.
MANUFACTURED HOUSING COMMUNITIES, MOBILE HOME PARKS AND RECREATIONAL
VEHICLE PARKS. Manufactured housing communities and mobile home parks consist of
land that is divided into "spaces" or "home sites" that are primarily leased to
owners of the individual mobile homes or other housing units. The home owner
often invests in site-specific improvements such as carports, steps, fencing,
skirts around the base of the home, and landscaping. The land owner typically
provides private roads within the park, common facilities and, in many cases,
utilities. Due to relocation costs and, in some cases, demand for homesites, the
value of a mobile home or other housing unit in place in a manufactured housing
community or mobile home park is generally higher, and can be significantly
higher, than the value of the same unit not placed in a manufactured housing
community or mobile home park. As a result, a well-operated manufactured housing
community or mobile home park that has achieved stabilized occupancy is
typically able to maintain occupancy at or near that level. For the same reason,
a lender that provided financing for the home of a tenant who defaulted in his
or her space rent generally has an incentive to keep rental payments current
until the home can be resold in place, rather than to allow the unit to be
removed from the park. In general, the individual mobile homes and other housing
units will not constitute collateral for a mortgage loan underlying a series of
offered certificates.
Recreational vehicle parks lease spaces primarily or exclusively for
motor homes, travel trailers and portable truck campers, primarily designed for
recreational, camping or travel use. In general, parks that lease recreational
vehicle spaces can be viewed as having a less stable tenant population than
parks occupied predominantly by mobile homes. However, it is not unusual for the
owner of a recreational vehicle to leave the vehicle at the park on a year-round
basis or to use the vehicle as low cost housing and reside in the park
indefinitely.
Factors affecting the successful operation of a manufactured housing
community, mobile home park or recreational vehicle park include:
- the number of comparable competing properties in the local
market;
- the age, appearance and reputation of the property;
- the quality of management; and
- the types of facilities and services it provides.
Manufactured housing communities and mobile home parks also compete
against alternative forms of residential housing, including--
- multifamily rental properties,
- cooperatively-owned apartment buildings,
- condominium complexes, and
- single-family residential developments.
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Recreational vehicle parks also compete against alternative forms of
recreation and short-term lodging, such as staying at a hotel at the beach.
Manufactured housing communities, mobile home parks and recreational
vehicle parks are special purpose properties that could not be readily converted
to general residential, retail or office use. This will adversely affect the
liquidation value of the property if its operation as a manufactured housing
community, mobile home park or recreational vehicle park, as the case may be,
becomes unprofitable due to competition, age of the improvements or other
factors.
Some states regulate the relationship of an owner of a manufactured
housing community or mobile home park and its tenants in a manner similar to the
way they regulate the relationship between a landlord and tenant at a
multifamily rental property. In addition, some states also regulate changes in
the use of a manufactured housing community or mobile home park and require that
the owner give written notice to its tenants a substantial period of time prior
to the projected change.
In addition to state regulation of the landlord-tenant relationship,
numerous counties and municipalities impose rent control on manufactured housing
communities and mobile home parks. These ordinances may limit rent increases to:
- fixed percentages,
- percentages of increases in the consumer price index,
- increases set or approved by a governmental agency, or
- increases determined through mediation or binding arbitration.
In many cases, the rent control laws either do not permit vacancy
decontrol or permit vacancy decontrol only in the relatively rare event that the
mobile home or manufactured housing unit is removed from the homesite. Local
authority to impose rent control on manufactured housing communities and mobile
home parks is pre-empted by state law in some states and rent control is not
imposed at the state level in those states. In some states, however, local rent
control ordinances are not pre-empted for tenants having short-term or
month-to-month leases, and properties there may be subject to various forms of
rent control with respect to those tenants.
RECREATIONAL AND RESORT PROPERTIES. Any mortgage loan underlying a
series of offered certificates may be secured by a golf course, marina, ski
resort, amusement park or other property used for recreational purposes or as a
resort. Factors affecting the economic performance of a property of this type
include:
- the location and appearance of the property;
- the appeal of the recreational activities offered;
- the existence or construction of competing properties, whether
are not they offer the same activities;
- the need to make capital expenditures to maintain, refurbish,
improve and/or expand facilities in order to attract potential
patrons;
- geographic location and dependence on tourism;
- changes in travel patterns caused by changes in energy prices,
strikes, location of highways, construction of additional
highways and similar factors;
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- seasonality of the business, which may cause periodic
fluctuations in operating revenues and expenses;
- sensitivity to weather and climate changes; and
- local, regional and national economic conditions.
A marina or other recreational or resort property located next to water
will also be affected by various statutes and government regulations that govern
the use of, and construction on, rivers, lakes and other waterways.
Because of the nature of the business, recreational and resort
properties tend to respond to adverse economic conditions more quickly than do
many other types of commercial properties.
Recreational and resort properties are generally special purpose
properties that are not readily convertible to alternative uses. This will
adversely affect their liquidation value.
ARENAS AND STADIUMS. The success of an arena or stadium generally
depends on its ability to attract patrons to a variety of events, including:
- sporting events;
- musical events;
- theatrical events;
- animal shows; and/or
- circuses.
The ability to attract patrons is dependent on, among others, the
following factors as:
- the appeal of the particular event;
- the cost of admission;
- perceptions by prospective patrons of the safety, convenience,
services and attractiveness of the arena or stadium;
- perceptions by prospective patrons of the safety of the
surrounding area; and
- the alternative forms of entertainment available in the
particular locale.
In some cases, an arena's or stadium's success will depend on its
ability to attract and keep a sporting team as a tenant. An arena or stadium may
become unprofitable, or unacceptable to a tenant of that type, due to decreased
attendance, competition and age of improvements. Often, substantial expenditures
must be made to modernize, refurbish and/or maintain existing facilities.
Arenas and stadiums are special purpose properties which cannot be
readily convertible to alternative uses. This will adversely affect their
liquidation value.
CHURCHES AND OTHER RELIGIOUS FACILITIES. Churches and other religious
facilities generally depend on charitable donations to meet expenses and pay for
maintenance and capital expenditures. The extent of those donations is dependent
on the attendance at any particular religious facility and the extent to which
attendees are prepared to make donations, which is influenced by a variety of
social, political and economic factors. Donations may be adversely affected by
economic conditions, whether local,
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regional or national. Religious facilities are special purpose properties that
are not readily convertible to alternative uses. This will adversely affect
their liquidation value.
PARKING LOTS AND GARAGES. The primary source of income for parking lots
and garages is the rental fees charged for parking spaces. Factors affecting the
success of a parking lot or garage include:
- the number of rentable parking spaces and rates charged;
- the location of the lot or garage and, in particular, its
proximity to places where large numbers of people work, shop
or live;
- the amount of alternative parking spaces in the area;
- the availability of mass transit; and
- the perceptions of the safety, convenience and services of the
lot or garage.
UNIMPROVED LAND. The value of unimproved land is largely a function of
its potential use. This may depend on--
- its location,
- its size,
- the surrounding neighborhood, and
- local zoning laws.
DEFAULT AND LOSS CONSIDERATIONS WITH RESPECT TO COMMERCIAL AND
MULTIFAMILY MORTGAGE LOANS. Mortgage loans secured by liens on income-producing
properties are substantially different from mortgage loans made on the security
of owner-occupied single-family homes. The repayment of a loan secured by a lien
on an income-producing property is typically dependent upon--
- the successful operation of the property, and
- its ability to generate income sufficient to make payments on
the loan.
This is particularly true because most or all of the mortgage loans underlying
the offered certificates will be nonrecourse loans.
The debt service coverage ratio of a multifamily or commercial mortgage
loan is an important measure of the likelihood of default on the loan. In
general, the debt service coverage ratio of a multifamily or commercial mortgage
loan at any given time is the ratio of--
- the amount of income derived or expected to be derived from
the related real property for a twelve-month period that is
available to pay debt service, to
- the annualized scheduled payments of principal and/or interest
on the mortgage loan and any other senior loans that are
secured by the related real property.
The amount described in the first bullet point of the preceding sentence is
often a highly subjective number based on a variety of assumptions regarding,
and adjustments to, revenues and expenses with respect to the related real
property. We will provide a more detailed discussion of its calculation in the
related prospectus supplement.
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The cash flow generated by a multifamily or commercial property will
generally fluctuate over time and may or may not be sufficient to make--
- the loan payments on the related mortgage loan,
- cover operating expenses, and
- fund capital improvements at any given time.
Operating revenues of a nonowner occupied, income- producing property
may be affected by the condition of the applicable real estate market and/or
area economy. Properties leased, occupied or used on a short-term basis, such
as--
- some health care-related facilities,
- hotels and motels,
- recreational vehicle parks, and
- mini-warehouse and self-storage facilities,
tend to be affected more rapidly by changes in market or business conditions
than do properties typically leased for longer periods, such as--
- warehouses,
- retail stores,
- office buildings, and
- industrial facilities.
Some commercial properties may be owner-occupied or leased to a small
number of tenants. Accordingly, the operating revenues may depend substantially
on the financial condition of the borrower or one or a few tenants. Mortgage
loans secured by liens on owner-occupied and single tenant properties may pose a
greater likelihood of default and loss than loans secured by liens on
multifamily properties or on multi-tenant commercial properties.
Increases in property operating expenses can increase the likelihood of
a borrower default on a multifamily or commercial mortgage loan secured by the
property. Increases in property operating expenses may result from:
- increases in energy costs and labor costs;
- increases in interest rates and real estate tax rates; and
- changes in governmental rules, regulations and fiscal
policies.
Some net leases of commercial properties may provide that the lessee,
rather than the borrower/landlord, is responsible for payment of operating
expenses. However, a net lease will result in stable net operating income to the
borrower/landlord only if the lessee is able to pay the increased operating
expense while also continuing to make rent payments.
Lenders also look to the loan-to-value ratio of a mortgage loan as a
factor in evaluating the likelihood of loss if a property is liquidated
following a default. In general, the loan-to-value ratio of a multifamily or
commercial mortgage loan at any given time is the ratio, expressed as a
percentage, of--
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- the then outstanding principal balance of the mortgage loan
and any other senior loans that are secured by the related
real property, to
- the estimated value of the related real property based on an
appraisal, a cash flow analysis, a recent sales price or
another method or benchmark of valuation.
A low loan-to-value ratio means the borrower has a large amount of its
own equity in the multifamily or commercial property that secures its loan. In
these circumstances--
- the borrower has a greater incentive to perform under the
terms of the related mortgage loan in order to protect that
equity, and
- the lender has greater protection against loss on liquidation
following a borrower default.
Loan-to-value ratios are not necessarily an accurate measure of the
likelihood of liquidation loss in a pool of multifamily and commercial mortgage
loans. For example, the value of a multifamily or commercial property as of the
date of initial issuance of a series of offered certificates may be less than
the estimated value determined at loan origination. The value of any real
property, in particular a multifamily or commercial property, will likely
fluctuate from time to time. Moreover, even a current appraisal is not
necessarily a reliable estimate of value. Appraised values of income-producing
properties are generally based on--
- the market comparison method, which takes into account the
recent resale value of comparable properties at the date of
the appraisal;
- the cost replacement method, which takes into account the cost
of replacing the property at the date of the appraisal;
- the income capitalization method, which takes into account the
property's projected net cash flow; or
- a selection from the values derived from the foregoing
methods.
Each of these appraisal methods presents analytical difficulties. For
example,
- 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 and discount rate.
If more than one appraisal method is used and significantly different
results are produced, an accurate determination of value and, correspondingly, a
reliable analysis of the likelihood of default and loss, is even more difficult.
The value of a multifamily or commercial property will be affected by
property performance. As a result, if a multifamily or commercial mortgage loan
defaults because the income generated by the
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related property is insufficient to pay operating costs and expenses as well as
debt service, then the value of the property will decline and a liquidation loss
may occur.
We believe that the foregoing considerations are important factors that
generally distinguish mortgage loans secured by liens on income-producing real
estate from single-family mortgage loans. However, the originators of the
mortgage loans underlying your offered certificates may not have considered all
of those factors for all or any of those loans.
See "Risk Factors--Repayment of a Commercial or Multifamily Mortgage
Loan Depends Upon the Performance and Value of the Underlying Real Property,
Which May Decline Over Time, and the Related Borrower's Ability to Refinance
the Property, of Which There is no Assurance."
PAYMENT PROVISIONS OF THE MORTGAGE LOANS. Each of the mortgage loans
included in one of our trusts will have the following features:
- an original term to maturity of not more than approximately 40
years; and
- scheduled payments of principal, interest or both, to be made
on specified dates, that occur monthly, bi-monthly, quarterly,
semi-annually, annually or at some other interval.
A mortgage loan included in one of our trusts may also include terms
that:
- provide for the accrual of interest at a mortgage interest
rate that is fixed over its term, that resets on one or more
specified dates or that otherwise adjusts from time to time;
- provide for the accrual of interest at a mortgage interest
rate that may be converted at the borrower's election from an
adjustable to a fixed interest rate or from a fixed to an
adjustable interest rate;
- provide for no accrual of interest;
- provide for level payments to stated maturity, for payments
that reset in amount on one or more specified dates or for
payments that otherwise adjust from time to time to
accommodate changes in the coupon rate or to reflect the
occurrence of specified events;
- be fully amortizing or, alternatively, may be partially
amortizing or nonamortizing, with a substantial payment of
principal due on its stated maturity date;
- permit the negative amortization or deferral of accrued
interest;
- permit defeasance and the release of the real property
collateral in connection with that defeasance; and/or
- prohibit some or all voluntary prepayments or require payment
of a premium, fee or charge in connection with those
prepayments.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS. We will describe
in the related prospectus supplement the characteristics of the mortgage loans
that we will include in any of our trusts. In general, we will provide in the
related prospectus supplement, among other items, the following information on
the particular mortgage loans in one of our trusts:
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- the total outstanding principal balance and the largest,
smallest and average outstanding principal balance of the
mortgage loans;
- the type or types of property that provide security for
repayment of the mortgage loans;
- the earliest and latest origination date and maturity date
of the mortgage loans;
- the original and remaining terms to maturity of the mortgage
loans, or the range of each of those terms to maturity, and
the weighted average original and remaining terms to maturity
of the mortgage loans;
- loan-to-value ratios of the mortgage loans either at
origination or as of a more recent date, or the range of those
loan-to-value ratios, and the weighted average of those
loan-to-value ratios;
- the mortgage interest rates of the mortgage loans, or the
range of those mortgage interest rates, and the weighted
average mortgage interest rate of the mortgage loans;
- if any mortgage loans have adjustable mortgage interest rates,
the index or indices upon which the adjustments are based, the
adjustment dates, the range of gross margins and the weighted
average gross margin, and any limits on mortgage interest rate
adjustments at the time of any adjustment and over the life of
the loan;
- information on the payment characteristics of the mortgage
loans, including applicable prepayment restrictions;
- debt service coverage ratios of the mortgage loans either at
origination or as of a more recent date, or the range of those
debt service coverage ratios, and the weighted average of
those debt service coverage ratios; and
- the geographic distribution of the properties securing the
mortgage loans on a state-by-state basis.
If we are unable to provide the specific information described above at
the time a series of offered certificates is initially offered, we will
provide--
- more general information in the related prospectus supplement,
and
- specific information in a report which will be filed with the
SEC as part of a Current Report on Form 8-K within 15 days
following the issuance of those certificates.
If any mortgage loan, or group of related mortgage loans, included in
one of our trusts represents a material concentration of credit risk, we will
include in the related prospectus supplement financial statements or other
financial information on the related real property or properties.
MORTGAGE-BACKED SECURITIES
The mortgage backed-securities underlying a series of offered
certificates may include:
- mortgage participations, mortgage pass-through certificates,
collateralized mortgage obligations or other mortgage-backed
securities that are not insured or guaranteed by any
governmental agency or instrumentality, or
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- certificates issued and/or insured or guaranteed by Freddie
Mac, Fannie Mae, Ginnie Mae, Farmer Mac, or another federal or
state governmental agency or instrumentality.
In addition, each of those mortgage-backed securities will directly or
indirectly evidence an interest in, or be secured by a pledge of, multifamily
and/or commercial mortgage loans.
Each mortgage-backed security included in one of our trusts--
- will have been registered under the Securities Act of 1933, as
amended, or
- will be exempt from the registration requirements of that Act,
or
- will have been held for at least the holding period specified
in Rule 144(k) under that Act, or
- may otherwise be resold by us publicly without registration
under that Act.
We will describe in the related prospectus supplement the
characteristics of the mortgage-backed securities that we will include in any of
our trusts. In general, we will provide in the related prospectus supplement,
among other items, the following information on the particular mortgage-backed
securities included in one of our trusts:
- the initial and outstanding principal amount(s) and type of
the securities;
- the original and remaining term(s) to stated maturity of the
securities;
- the pass-through or bond rate(s) of the securities or the
formula for determining those rate(s);
- the payment characteristics of the securities;
- the identity of the issuer(s), servicer(s) and trustee(s) for
the securities;
- a description of the related credit support, if any;
- the type of mortgage loans underlying the securities;
- the circumstances under which the related underlying mortgage
loans, or the securities themselves, may be purchased prior to
maturity;
- the terms and conditions for substituting mortgage loans
backing the securities; and
- the characteristics of any agreements or instruments providing
interest rate protection to the securities.
With respect to any mortgage-backed security included in one of our
trusts, we will provide in our reports filed under the Securities Exchange Act
of 1934, as amended, the same information regarding the security as is provided
by the issuer of the security in its own reports filed under that Act, if the
security was publicly offered, or in the reports the issuer of the security
provides to the related trustee, if the security was privately issued.
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SUBSTITUTION, ACQUISITION AND REMOVAL OF MORTGAGE ASSETS
If so specified in the related prospectus supplement, we or another
specified person or entity may be permitted, at our or its option, but subject
to the conditions specified in that prospectus supplement, to acquire from the
related trust particular mortgage assets underlying a series of offered
certificates in exchange for:
- cash that would be applied to pay down the principal balances
of the certificates of that series; and/or
- other mortgage loans or mortgage-backed securities that--
1. conform to the description of mortgage assets in this
prospectus, and
2. satisfy the criteria set forth in the related
prospectus supplement.
In addition, if so specified in the related prospectus supplement, the
trustee may be authorized or required to apply collections on the related
mortgage assets to acquire new mortgage loans or mortgage-backed securities
that--
1. conform to the description of mortgage assets in this
prospectus, and
2. satisfy the criteria set forth in the related prospectus
supplement.
No replacement of mortgage assets or acquisition of new mortgage assets
will be permitted if it would result in a qualification, downgrade or withdrawal
of the then-current rating assigned by any rating agency to any class of
affected offered certificates.
UNDELIVERED MORTGAGE ASSETS
In general, the total outstanding principal balance of the mortgage
assets transferred by us to any particular trust will equal or exceed the
initial total outstanding principal balance of the related series of
certificates. In the event that the total outstanding principal balance of the
related mortgage assets initially delivered by us to the related trustee is less
than the initial total outstanding principal balance of any series of
certificates, we may deposit or arrange for the deposit of cash or liquid
investments on an interim basis with the related trustee to cover the shortfall.
For 90 days following the date of initial issuance of that series of
certificates, we will be entitled to obtain a release of the deposited cash or
investments if we deliver or arrange for delivery of a corresponding amount of
mortgage assets. If we fail, however, to deliver mortgage assets sufficient to
make up the entire shortfall, any of the cash or, following liquidation,
investments remaining on deposit with the related trustee will be used by the
related trustee to pay down the total principal balance of the related series of
certificates, as described in the related prospectus supplement.
ACCOUNTS
The trust assets underlying a series of offered certificates will
include one or more accounts established and maintained on behalf of the
holders. All payments and collections received or advanced on the mortgage
assets and other trust assets will be deposited and held in those accounts. We
will
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identify and describe those accounts, and will further describe the deposits to
and withdrawals from those accounts, in the related prospectus supplement.
CREDIT SUPPORT
GENERAL. The holders of any class of offered certificates may be the
beneficiaries of credit support designed to protect them partially or fully
against all or particular defaults and losses on the related mortgage assets.
The types of credit support that may benefit the holders of a class of offered
certificates include:
- the subordination or one or more other classes of certificates
of the same series;
- a letter of credit;
- a surety bond;
- an insurance policy;
- a guarantee;
- a credit derivative; and/or
- a reserve fund.
In the related prospectus supplement, we will describe the amount and
types of any credit support benefiting the holders of a class of offered
certificates.
ARRANGEMENTS PROVIDING REINVESTMENT, INTEREST RATE AND CURRENCY RELATED
PROTECTION
The trust assets for a series of offered certificates may include
guaranteed investment contracts in accordance with which moneys held in the
funds and accounts established for that series will be invested at a specified
rate. Those trust assets may also include:
- interest rate exchange agreements;
- interest rate cap agreements;
- interest rate floor agreements;
- currency exchange agreements; or
- other agreements or arrangements designed to reduce the
effects of interest rate or currency exchange rate
fluctuations with respect to the related mortgage assets and
one or more classes of offered certificates.
In the related prospectus supplement, we will describe any agreements
or other arrangements designed to protect the holders of a class of offered
certificates against shortfalls resulting from movements or fluctuations in
interest rates or currency exchange rates. If applicable, we will also identify
any obligor under the agreement or other arrangement.
YIELD AND MATURITY CONSIDERATIONS
GENERAL
The yield on your offered certificates will depend on--
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- the price you paid for your offered certificates,
- the pass-through rate on your offered certificates,
- the amount and timing of payments on your offered
certificates.
The following discussion contemplates a trust established by us that
consists only of mortgage loans. If one of our trusts also includes a
mortgage-backed security, the payment terms of that security will soften or
enhance the effects that the characteristics and behavior of mortgage loans
backing that security can have on the yield to maturity and/or weighted average
life of a class of offered certificates. If one of our trusts includes a
mortgage-backed security, we will discuss in the related prospectus supplement
the effect, if any, that the security may have on the yield to maturity and
weighted average lives of the related offered certificates.
PASS-THROUGH RATE
A class of interest-bearing offered certificates may have a fixed,
variable or adjustable pass-through rate. We will specify in the related
prospectus supplement the pass-through rate for each class of interest-bearing
offered certificates or, if the pass-through rate is variable or adjustable, the
method of determining the pass-through rate.
PAYMENT DELAYS
There will be a delay between the date on which payments on the
underlying mortgage loans are due and the date on which those payments are
passed through to you and other investors. That delay will reduce the yield that
would otherwise be produced if those payments were passed through on your
offered certificates on the same date that they were due.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity on your offered certificates will be affected by
the rate of principal payments on the underlying mortgage loans and the
allocation of those principal payments to reduce the principal balance or
notional amount of your offered certificates. The rate of principal payments on
those mortgage loans will be affected by the following:
- the amortization schedules of the mortgage loans, which may
change from time to time to reflect, among other things,
changes in mortgage interest rates or partial prepayments of
principal;
- the dates on which any balloon payments are due; and
- the rate of principal prepayments on the mortgage loans,
including voluntary prepayments by borrowers and involuntary
prepayments resulting from liquidations, casualties or
purchases of mortgage loans.
Because the rate of principal prepayments on the mortgage loans
underlying your offered certificates will depend on future events and a variety
of factors, we cannot give you any assurance as to that rate.
The extent to which the yield to maturity of your offered certificates
may vary from your anticipated yield will depend upon--
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- whether you purchased your offered certificates at a discount
or premium and, if so, the extent of that discount or premium,
and
- when, and to what degree, payments of principal on the
underlying mortgage loans are applied or otherwise result in
the reduction of the principal balance or notional amount of
your offered certificates.
If you purchase your offered certificates at a discount, you should
consider the risk that a slower than anticipated rate of principal payments on
the underlying mortgage loans could result in an actual yield to you that is
lower than your anticipated yield. If you purchase your offered certificates at
a premium, you should consider the risk that a faster than anticipated rate of
principal payments on the underlying mortgage loans could result in an actual
yield to you that is lower than your anticipated yield.
If your offered certificates entitle you to payments of interest, with
disproportionate, nominal or no payments of principal, you should consider that
your yield will be extremely sensitive to prepayments on the underlying mortgage
loans and, under some prepayment scenarios, may be negative.
If a class of offered certificates accrues interest on a notional
amount, that notional amount will, in general, either--
- be based on the principal balances of some or all of the
mortgage assets in the related trust, or
- equal the total principal balance of one or more of the other
classes of certificates of the same series.
Accordingly, the yield on that class of certificates will be inversely related
to, as applicable, the rate at which--
- payments and other collections of principal are received on
the mortgage assets referred to in the first bullet point of
the prior sentence, or
- payments are made in reduction of the total principal balance
of the class or classes of certificates referred to in the
second bullet point of the prior sentence.
The extent of prepayments of principal of the mortgage loans underlying
your offered certificates may be affected by a number of factors, including:
- the availability of mortgage credit;
- the relative economic vitality of the area in which the
related real properties are located;
- the quality of management of the related real properties;
- the servicing of the mortgage loans;
- possible changes in tax laws; and
- other opportunities for investment.
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In general, those factors that increase--
- the attractiveness of selling or refinancing a commercial or
multifamily property, or
- the likelihood of default under a commercial or multifamily
mortgage loan,
would be expected to cause the rate of prepayment to accelerate. In contrast,
those factors having an opposite effect would be expected to cause the rate of
prepayment to slow.
The rate of principal payments on the mortgage loans underlying your
offered certificates may also be affected by the existence and enforceability of
prepayment restrictions, such as--
- prepayment lock-out periods, and
- requirements that voluntary principal prepayments be
accompanied by prepayment premiums, fees or charges.
If enforceable, those provisions could constitute either an absolute
prohibition, in the case of a prepayment lock-out period, or a disincentive, in
the case of a prepayment premium, fee or charge, to a borrower's voluntarily
prepaying its mortgage loan, thereby slowing the rate of prepayments.
The rate of prepayment on a pool of mortgage loans is likely to be
affected by prevailing market interest rates for mortgage loans of a comparable
type, term and risk level. As prevailing market interest rates decline, a
borrower may have an increased incentive to refinance its mortgage loan. Even in
the case of adjustable rate mortgage loans, as prevailing market interest rates
decline, the related borrowers may have an increased incentive to refinance for
the following purposes:
- to convert to a fixed rate loan and thereby lock in that rate,
or
- to take advantage of a different index, margin or rate cap or
floor on another adjustable rate mortgage loan.
Subject to prevailing market interest rates and economic conditions
generally, a borrower may sell a real property in order to--
- realize its equity in the property,
- meet cash flow needs or
- make other investments.
Additionally, some borrowers may be motivated by federal and state tax
laws, which are subject to change, to sell their properties prior to the
exhaustion of tax depreciation benefits.
We make no representation as to--
- the particular factors that will affect the prepayment of the
mortgage loans underlying any series of offered certificates,
- the relative importance of those factors
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- the percentage of the principal balance of those mortgage
loans that will be paid as of any date, or
- the overall rate of prepayment on those mortgage loans.
WEIGHTED AVERAGE LIFE AND MATURITY
The rate at which principal payments are received on the mortgage loans
underlying any series of offered certificates will affect the ultimate maturity
and the weighted average life of one or more classes of those certificates. In
general, weighted average life refers to the average amount of time that will
elapse from the date of issuance of an instrument until each dollar allocable as
principal of that instrument is repaid to the investor.
The weighted average life and maturity of a class of offered
certificates will be influenced by the rate at which principal on the underlying
mortgage loans is paid to that class, whether in the form of--
- scheduled amortization or
- prepayments, including
1. voluntary prepayments by borrowers, and
2. involuntary prepayments resulting from liquidations,
casualties or condemnations and purchases of mortgage
loans out of the related trust.
Prepayment rates on loans are commonly measured relative to a
prepayment standard or model, such as the CPR prepayment model or the SPA
prepayment model. CPR represents an assumed constant rate of prepayment each
month, expressed as an annual percentage, relative to the then outstanding
principal balance of a pool of mortgage loans for the life of those loans. SPA
represents an assumed variable rate of prepayment each month, expressed as an
annual percentage, relative to the then outstanding principal balance of a pool
of mortgage loans, with different prepayment assumptions often expressed as
percentages of SPA. For example, a prepayment assumption of 100% of SPA assumes
prepayment rates of 0.2% per annum of the then outstanding principal balance of
those loans in the first month of the life of the loans and an additional 0.2%
per annum in each month thereafter until the 30th month. Beginning in the 30th
month, and in each month thereafter during the life of the loans, 100% of SPA
assumes a constant prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption is a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any particular pool of mortgage loans.
Moreover, the CPR and SPA models were developed based upon historical prepayment
experience for single-family mortgage loans. It is unlikely that the prepayment
experience of the mortgage loans underlying your offered certificates will
conform to any particular level of CPR or SPA.
In the prospectus supplement for a series of offered certificates, we
will include tables, if applicable, setting forth--
- the projected weighted average life of each class of those
offered certificates with principal balances, and
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- the percentage of the initial total principal balance of each
class of those offered certificates that would be outstanding
on specified dates,
based on the assumptions stated in that prospectus supplement, including
assumptions regarding prepayments on the underlying mortgage loans. Those tables
and assumptions illustrate the sensitivity of the weighted average lives of
those offered certificates to various assumed prepayment rates and are not
intended to predict, or to provide information that will enable you to predict,
the actual weighted average lives of your offered certificates.
OTHER FACTORS AFFECTING YIELD, WEIGHTED AVERAGE LIFE AND MATURITY
BALLOON PAYMENTS; EXTENSIONS OF MATURITY. Some or all of the mortgage
loans underlying a series of offered certificates may require that balloon
payments be made at maturity. The ability of a borrower to make a balloon
payment typically will depend upon its ability either--
- to refinance the loan, or
- to sell the related real property.
If a borrower is unable to refinance or sell the related real property, there is
a possibility that the borrower may default on the mortgage loan or that the
maturity of the mortgage loan may be extended in connection with a workout. If a
borrower defaults, recovery of proceeds may be delayed by--
- the bankruptcy of the borrower, or
- adverse economic conditions in the market where the related
real property is located.
In order to minimize losses on defaulted mortgage loans, the related
master servicer or special servicer may be authorized within prescribed limits
to modify mortgage loans that are in default or as to which a payment default is
reasonably foreseeable. Any defaulted balloon payment or modification that
extends the maturity of a mortgage loan may delay payments of principal on your
offered certificates and extend the weighted average life of your offered
certificates.
NEGATIVE AMORTIZATION. The weighted average life of a class of offered
certificates can be affected by mortgage loans that permit negative amortization
to occur. Those are the mortgage loans that provide for the current payment of
interest calculated at a rate lower than the rate at which interest accrues on
the mortgage loan, with the unpaid portion of that interest being added to the
related principal balance. Negative amortization most commonly occurs with
respect to an adjustable rate mortgage loan that:
- limits the amount by which its scheduled payment may adjust in
response to a change in its mortgage interest rate;
- provides that its scheduled payment will adjust less
frequently than its mortgage interest rate; or
- provides for constant scheduled payments regardless of
adjustments to its mortgage interest rate.
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Negative amortization on one or more mortgage loans in any of our
trusts may result in negative amortization on a related class of offered
certificates. We will describe in the related prospectus supplement, if
applicable, the manner in which negative amortization with respect to the
underlying mortgage loans is allocated among the respective classes of a series
of offered certificates.
The portion of any mortgage loan negative amortization allocated to a
class of offered certificates may result in a deferral of some or all of the
interest payable on those certificates. Deferred interest may be added to the
total principal balance of a class of offered certificates. In addition, an
adjustable rate mortgage loan that permits negative amortization would be
expected during a period of increasing interest rates to amortize, if at all, at
a slower rate than if interest rates were declining or were remaining constant.
This slower rate of mortgage loan amortization would be reflected in a slower
rate of amortization for one or more classes of certificates of the related
series. Accordingly, there may be an increase in the weighted average lives of
those classes of certificates to which any mortgage loan negative amortization
would be allocated or that would bear the effects of a slower rate of
amortization of the underlying mortgage loans.
The extent to which the yield on your offered certificates may be
affected by any negative amortization on the underlying mortgage loans will
depend, in part, upon whether you purchase your offered certificates at a
premium or a discount.
During a period of declining interest rates, the scheduled payment on
an adjustable rate mortgage loan may exceed the amount necessary to amortize the
loan fully over its remaining amortization schedule and pay interest at the then
applicable mortgage interest rate. The result is the accelerated amortization of
the mortgage loan. The acceleration in amortization of a mortgage loan will
shorten the weighted average lives of those classes of certificates that entitle
their holders to a portion of the principal payments on the mortgage loan.
FORECLOSURES AND PAYMENT PLANS. The weighted average life of and yield
on your offered certificates will be affected by--
- the number of foreclosures with respect to the underlying
mortgage loans; and
- the principal amount of the foreclosed mortgage loans in
relation to the principal amount of those mortgage loans that
are repaid in accordance with their terms.
Servicing decisions made with respect to the underlying mortgage loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of mortgage loans in bankruptcy proceedings or otherwise, may also
affect the payment patterns of particular mortgage loans and, as a result, the
weighted average life of and yield on your offered certificates.
LOSSES AND SHORTFALLS ON THE MORTGAGE ASSETS. The yield on your offered
certificates will directly depend on the extent to which you are required to
bear the effects of any losses or shortfalls in collections on the underlying
mortgage loans and the timing of those losses and shortfalls. In general, the
earlier that you bear any loss or shortfall, the greater will be the negative
effect on the yield of your offered certificates.
The amount of any losses or shortfalls in collections on the mortgage
assets in any of our trusts will, to the extent not covered or offset by draws
on any reserve fund or under any instrument of credit
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support, be allocated among the various classes of certificates of the related
series in the priority and manner, and subject to the limitations, that we
specify in the related prospectus supplement. As described in the related
prospectus supplement, those allocations may be effected by the following:
- a reduction in the entitlements to interest and/or the total
principal balances of one or more classes of certificates;
and/or
- the establishment of a priority of payments among classes of
certificates.
If you purchase subordinated certificates, the yield to maturity on
those certificates may be extremely sensitive to losses and shortfalls in
collections on the underlying mortgage loans.
ADDITIONAL CERTIFICATE AMORTIZATION. If your offered certificates have
a principal balance, then they entitle you to a specified portion of the
principal payments received on the underlying mortgage loans. They may also
entitle you to payments of principal from the following sources:
- amounts attributable to interest accrued but not currently
payable on one or more other classes of certificates of the
applicable series;
- interest received or advanced on the underlying mortgage
assets that is in excess of the interest currently accrued on
the certificates of the applicable series;
- prepayment premiums, fees and charges, payments from equity
participations or any other amounts received on the underlying
mortgage assets that do not constitute interest or principal;
or
- any other amounts described in the related prospectus
supplement.
The amortization of your offered certificates out of the sources
described in the prior paragraph would shorten their weighted average life and,
if your offered certificates were purchased at a premium, reduce their yield to
maturity.
STRUCTURED ASSET SECURITIES CORPORATION
We were incorporated in Delaware on January 2, 1987. We were organized,
among other things, for the purposes of--
- acquiring mortgage loans, or interests in those loans, secured
by first or junior liens on commercial and multifamily real
properties;
- acquiring mortgage-backed securities that evidence interests
in mortgage loans that are secured by commercial and
multifamily real properties;
- forming pools of mortgage loans and mortgage-backed
securities; and
- acting as depositor of one or more trusts formed to issue
bonds, certificates of interest or other evidences of
indebtedness that are secured by or represent interests in,
pools of mortgage loans and mortgage-backed securities.
Our principal executive offices are located at 200 Vesey Street, New York, New
York 10285. Our telephone number is 212-526-7000. There can be no assurance that
at any particular time we will have any significant assets.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
Each series of offered certificates, together with any non-offered
certificates of the same series, will represent the entire beneficial ownership
interest in a trust established by us. Each series of offered certificates will
consist of one or more classes. Any non-offered certificates of that series will
likewise consist of one or more classes.
A series of certificates consists of all those certificates that--
- have the same series designation;
- were issued under the same governing documents; and
- represent beneficial ownership interests in the same trust.
A class of certificates consists of all those certificates of a
particular series that--
- have the same class designation; and
- have the same payment terms.
The respective classes of offered and non-offered certificates of any
series may have a variety of payment terms. An offered certificate may entitle
the holder to receive:
- a stated principal amount, which will be represented by its
principal balance;
- interest on a principal balance or notional amount, at a
fixed, variable or adjustable pass-through rate;
- specified, fixed or variable portions of the interest,
principal or other amounts received on the related mortgage
assets;
- payments of principal, with disproportionate, nominal or no
payments of interest;
- payments of interest, with disproportionate, nominal or no
payments of principal;
- payments of interest or principal that commence only as of a
specified date or only after the occurrence of specified
events, such as the payment in full of the interest and
principal outstanding on one or more other classes of
certificates of the same series;
- payments of principal to be made, from time to time or for
designated periods, at a rate that is--
1. faster and, in some cases, substantially faster, or
2. slower and, in some cases, substantially slower,
than the rate at which payments or other collections of
principal are received on the related mortgage assets;
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- payments of principal to be made, subject to available funds,
based on a specified principal payment schedule or other
methodology; or
- payments of all or part of the prepayment or repayment
premiums, fees and charges, equity participations payments or
other similar items received on the related mortgage assets.
Any class of offered certificates may be senior or subordinate to one
or more other classes of certificates of the same series, including a
non-offered class of certificates of that series, for purposes of some or all
payments and/or allocations of losses or other shortfalls.
A class of offered certificates may have two or more component parts,
each having characteristics that are described in this prospectus as being
attributable to separate and distinct classes. For example, a class of offered
certificates may have a total principal balance on which it accrues interest at
a fixed, variable or adjustable rate. That class of offered certificates may
also accrue interest on a total notional amount at a different fixed, variable
or adjustable rate. In addition, a class of offered certificates may accrue
interest on one portion of its total principal balance or notional amount at one
fixed, variable or adjustable rate and on another portion of its total principal
balance or notional amount at a different fixed, variable or adjustable rate.
Each class of offered certificates will be issued in minimum
denominations corresponding to specified principal balances, notional amounts or
percentage interests, as described in the related prospectus supplement. A class
of offered certificates may be issued in fully registered, definitive form and
evidenced by physical certificates or may be issued in book-entry form through
the facilities of The Depository Trust Company. Offered certificates held in
fully registered, definitive form may be transferred or exchanged, subject to
any restrictions on transfer described in the related prospectus supplement, at
the location specified in the related prospectus supplement, without the payment
of any service charges, except for any tax or other governmental charge payable
in connection with the transfer or exchange. Interests in offered certificates
held in book-entry form will be transferred on the book-entry records of DTC and
its participating organizations. If we so specify in the related prospectus
supplement, we will arrange for clearance and settlement through Clearstream
Banking, societe anonyme or the Euroclear System, for so long as they are
participants in DTC.
PAYMENTS ON THE CERTIFICATES
GENERAL. Payments on a series of offered certificates may occur
monthly, bi-monthly, quarterly, semi-annually, annually or at any other
specified interval. In the prospectus supplement for each series of offered
certificates, we will identify:
- the periodic payment date for that series, and
- the record date as of which certificateholders entitled to
payments on any particular payment date will be established.
All payments with respect to a class of offered certificates on any
payment date will be allocated PRO RATA among the outstanding certificates of
that class in proportion to the respective principal balances, notional amounts
or percentage interests, as the case may be, of those certificates. Payments on
an offered certificate will be made to the holder entitled thereto either--
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- by wire transfer of immediately available funds to the account
of that holder at a bank or similar entity, provided that the
holder has furnished the party making the payments with wiring
instructions no later than the applicable record date and has
satisfied any other conditions specified in the related
prospectus supplement, or
- by check mailed to the address of that holder as it appears in
the certificate register, in all other cases.
In general, the final payment on any offered certificate will be made
only upon presentation and surrender of that certificate at the location
specified to the holder in notice of final payment.
PAYMENTS OF INTEREST. In the case of each class of interest-bearing
offered certificates, interest will accrue from time to time, at the applicable
pass-through rate and in accordance with the applicable interest accrual method,
on the total outstanding principal balance or notional amount of that class.
The pass-through rate for a class of interest-bearing offered
certificates may be fixed, variable or adjustable. We will specify in the
related prospectus supplement the pass-through rate for each class of
interest-bearing offered certificates or, in the case of a variable or
adjustable pass-through rate, the method for determining that pass-through rate.
Interest may accrue with respect to any offered certificate on the
basis of:
- a 360-day year consisting of 12 30-day months,
- the actual number of days elapsed during each relevant period
in a year assumed to consist of 360 days,
- the actual number of days elapsed during each relevant period
in a normal calendar year, or
- any other method identified in the related prospectus
supplement.
We will identify the interest accrual method for each class of offered
certificates in the related prospectus supplement.
Subject to available funds and any adjustments to interest entitlements
described in the related prospectus supplement, accrued interest with respect to
each class of interest-bearing offered certificates will normally be payable on
each payment date. However, in the case of some classes of interest-bearing
offered certificates, payments of accrued interest will only begin on a
particular payment date or under the circumstances described in the related
prospectus supplement. Prior to that time, the amount of accrued interest
otherwise payable on that class will be added to its total principal balance on
each date or otherwise deferred as described in the related prospectus
supplement.
If a class of offered certificates accrues interest on a total notional
amount, that total notional amount, in general, will be either:
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- based on the principal balances of some or all of the related
mortgage assets; or
- equal to the total principal balances of one or more other
classes of certificates of the same series.
Reference to the notional amount of any certificate is solely for
convenience in making calculations of interest and does not represent the right
to receive any payments of principal.
We will describe in the related prospectus supplement the extent to
which the amount of accrued interest that is payable on, or that may be added to
the total principal balance of, a class of interest-bearing offered certificates
may be reduced as a result of any contingencies, including shortfalls in
interest collections due to prepayments, delinquencies, losses and deferred
interest on the related mortgage assets.
PAYMENTS OF PRINCIPAL. An offered certificate may or may not have a
principal balance. If it does, that principal balance outstanding from time to
time will represent the maximum amount that the holder of that certificate will
be entitled to receive as principal out of the future cash flow on the related
mortgage assets and the other related trust assets.
The total outstanding principal balance of any class of offered
certificates will be reduced by--
- payments of principal actually made to the holders of that
class, and
- if and to the extent that we so specify in the related
prospectus supplement, losses of principal on the related
mortgage assets that are allocated to or are required to be
borne by that class.
A class of interest-bearing offered certificates may provide that
payments of accrued interest will only begin on a particular payment date or
under the circumstances described in the related prospectus supplement. If so,
the total outstanding principal balance of that class may be increased by the
amount of any interest accrued, but not currently payable, on that class.
We will describe in the related prospectus supplement any other
adjustments to the total outstanding principal balance of a class of offered
certificates.
Unless we so state in the related prospectus supplement, the initial
total principal balance of all classes of a series will not be greater than the
total outstanding principal balance of the related mortgage assets transferred
by us to the related trust. We will specify the expected initial total principal
balance of each class of offered certificates in the related prospectus
supplement.
The payments of principal to be made on a series of offered
certificates from time to time will, in general, be a function of the payments,
other collections and advances received or made with respect to
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the related prospectus supplement. Payments of principal on a series of offered
certificates may also be made from the following sources:
- amounts attributable to interest accrued but not currently
payable on one or more other classes of certificates of the
applicable series;
- interest received or advanced on the underlying mortgage
assets that is in excess of the interest currently accrued on
the certificates of the applicable series;
- prepayment premiums, fees and charges, payments from equity
participations or any other amounts received on the underlying
mortgage assets that do not constitute interest or principal;
or
- any other amounts described in the related prospectus
supplement.
We will describe in the related prospectus supplement the principal
entitlement of each class of offered certificates on each payment date.
ALLOCATION OF LOSSES AND SHORTFALLS
If and to the extent that any losses or shortfalls in collections on
the mortgage assets in any of our trusts are not covered or offset by
delinquency advances or draws on any reserve fund or under any instrument of
credit support, they will be allocated among the various classes of certificates
of the related series in the priority and manner, and subject to the
limitations, specified in the related prospectus supplement. As described in the
related prospectus supplement, the allocations may be effected as follows:
- by reducing the entitlements to interest and/or the total
principal balances of one or more of those classes; and/or
- by establishing a priority of payments among those classes.
See "Description of Credit Support."
ADVANCES
If any trust established by us includes mortgage loans, then as and to
the extent described in the related prospectus supplement, the related master
servicer, the related special servicer, the related trustee, any related
provider of credit support and/or any other specified person may be obligated to
make, or may have the option of making, advances with respect to those mortgage
loans to cover--
- delinquent payments of principal and/or interest, other than
balloon payments,
- property protection expenses,
- other servicing expenses, or
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- any other items specified in the related prospectus
supplement.
If there are any limitations with respect to a party's advancing
obligations, we will discuss those limitations in the related prospectus
supplement.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to certificateholders. Advances are not a guarantee
against losses. The advancing party will be entitled to recover all of its
advances out of--
- subsequent recoveries on the related mortgage loans, including
amounts drawn under any fund or instrument constituting credit
support, and
- any other specific sources identified in the related
prospectus supplement.
If and to the extent that we so specify in the related prospectus
supplement, any entity making advances will be entitled to receive interest on
some or all of those advances for a specified period during which they are
outstanding at the rate specified in that prospectus supplement. That entity may
be entitled to payment of interest on its outstanding advances--
- periodically from general collections on the mortgage assets
in the related trust, prior to any payment to the related
series of certificateholders, or
- at any other times and from such sources as we may describe
in the related prospectus supplement.
If any trust established by us includes mortgage-backed securities, we
will discuss in the related prospectus supplement any comparable advancing
obligations with respect to those securities or the mortgage loans that back
them.
REPORTS TO CERTIFICATEHOLDERS
On or about each payment date, the related master servicer, manager or
trustee will forward to each offered certificateholder a statement substantially
in the form, or specifying the information, set forth in the related prospectus
supplement. In general, that statement will include information regarding--
- the payments made on that payment date with respect to the
applicable class of offered certificates, and
- the recent performance of the mortgage assets.
Within a reasonable period of time after the end of each calendar year,
the related master servicer, manager or trustee, as the case may be, will be
required to furnish to each person who at any time during the calendar year was
a holder of an offered certificate a statement containing information regarding
the principal, interest and other amounts paid on the applicable class of
offered certificates, aggregated for--
- that calendar year, or
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- the applicable portion of that calendar year during which the
person was a certificateholder.
The obligation to provide that annual statement will be deemed to have been
satisfied by the related master servicer, manager or trustee, as the case may
be, to the extent that substantially comparable information is provided in
accordance with any requirements of the Internal Revenue Code of 1986.
If one of our trusts includes mortgage-backed securities, the ability
of the related master servicer, manager or trustee, as the case may be, to
include in any payment date statement information regarding the mortgage loans
that back those securities will depend on comparable reports being received with
respect to them.
VOTING RIGHTS
Voting rights will be allocated among the respective classes of offered
and non-offered certificates of each series in the manner described in the
related prospectus supplement. Certificateholders will generally not have a
right to vote, except--
- with respect to those amendments to the governing documents
described under "Description of the Governing
Documents--Amendment", or
- as otherwise specified in this prospectus or in the related
prospectus supplement.
As and to the extent described in the related prospectus supplement,
the certificateholders entitled to a specified amount of the voting rights for a
particular series will have the right to act as a group to remove or replace the
related trustee, master servicer, special servicer or manager. In general, that
removal or replacement must be for cause. We will identify exceptions in the
related prospectus supplement.
TERMINATION
The trust for each series of offered certificates will terminate and
cease to exist following:
- the final payment or other liquidation of the last mortgage
asset in that trust; and
- the payment, or provision for payment, to the
certificateholders of that series of all amounts required to
be paid to them.
Written notice of termination of a trust will be given to each affected
certificateholder. The final payment will be made only upon presentation and
surrender of the certificates of the related series at the location to be
specified in the notice of termination.
If we so specify in the related prospectus supplement, one or more
designated parties will be entitled to purchase all of the mortgage assets
underlying a series of offered certificates, thereby effecting early retirement
of the certificates and early termination of the related trust. We will describe
in the related prospectus supplement the circumstances under which that purchase
may occur.
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In addition, if we so specify in the related prospectus supplement, on
a specified date or upon the reduction of the total principal balance of a
specified class or classes of certificates by a specified percentage or amount,
a party designated in the related prospectus supplement may be authorized or
required to solicit bids for the purchase of all the mortgage assets of the
related trust or of a sufficient portion of the mortgage assets to retire that
class or those classes of certificates. The solicitation of bids must be
conducted in a commercially reasonable manner, and assets will, in general, be
sold at their fair market value. If the fair market value of the mortgage assets
being sold is less than their unpaid balance, then the certificateholders of one
or more classes of certificates may receive an amount less than the total
principal balance of, and accrued and unpaid interest on, their certificates.
BOOK-ENTRY REGISTRATION
GENERAL. Any class of offered certificates may be issued in book-entry
form through the facilities of DTC. If so, that class will be represented by one
or more global certificates registered in the name of DTC or its nominee. If we
so specify in the related prospectus supplement, we will arrange for clearance
and settlement through the Euroclear System or Clearstream Banking, societe
anonyme, for so long as they are participants in DTC.
DTC, EUROCLEAR AND CLEARSTREAM. DTC is:
- a limited-purpose trust company organized under the New York
Banking Law,
- a "banking corporation" within the meaning of the New York
Banking Law,
- a member of the Federal Reserve System,
- a "clearing corporation" within the meaning of the New York
Uniform Commercial Code, and
- a "clearing agency" registered under the provisions of Section
17A of the Securities Exchange Act of 1934, as amended.
DTC was created to hold securities for participants in the DTC system
and to facilitate the clearance and settlement of securities transactions
between those participants through electronic computerized book-entry changes in
their accounts, thereby eliminating the need for physical movement of securities
certificates. Organizations that maintain accounts with DTC include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include other organizations. DTC is owned by a number of its participating
organizations and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as banks, brokers, dealers
and trust companies that directly or indirectly clear through or maintain a
custodial relationship with one of the organizations that maintains an account
with DTC. The rules applicable to DTC and its participating organizations are on
file with the SEC.
It is our understanding that Clearstream was incorporated in 1970 as
"Cedel S.A.," a company with limited liability under the laws of Luxembourg.
Cedel S.A. subsequently changed its name to Cedelbank. On January 10, 2000,
Cedelbank's parent company, Cedel International, societe anonyme
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merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG. The merger involved the transfer by Cedel International of
substantially all of its assets and liabilities, including its shares in
Cedelbank, to a new Luxembourg company, New Cedel International, societe
anonyme. New Cedel International is 50% owned by Cedel International and 50% by
Deutsche Borse AG, the parent of Deutsche Borse Clearing AG. The shareholders of
these two entities are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. On January 18, 2000, Cedelbank was renamed
Clearstream Banking, societe anonyme. Clearstream holds securities for its
member organizations and facilitates the clearance and settlement of securities
transactions between its member organizations through electronic book-entry
changes in accounts of those organizations, thereby eliminating the need for
physical movement of certificates. Transactions may be settled in Clearstream in
any of 36 currencies, including United States dollars. Clearstream provides to
its member organizations, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream interfaces with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream is registered as a bank in Luxembourg, and
as such is subject to regulation by the Commission de Surveillance du Secteur
Financier, which supervises Luxembourg banks. Clearstream's customers are
world-wide financial institutions including underwriters, securities brokers and
dealers, banks, trust companies and clearing corporations. Clearstream's U.S.
customers are limited to securities brokers and dealers, and banks. Currently,
Clearstream has approximately 2,000 customers located in over 80 countries,
including all major European countries, Canada and the United States. Indirect
access to Clearstream is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream.
Clearstream and Euroclear have established an electronic bridge between their
two systems across which their respective participants may settle trades with
each other.
It is our understanding that Euroclear was founded in December 1968 to
hold securities for its member organizations and to clear and settle
transactions between its member organizations 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. Over 100,000 different securities are accepted for
settlement through Euroclear, the majority of which are domestic securities from
over 30 markets. Transactions may be settled in Euroclear in any of over 35
currencies, including United States dollars. The Euroclear system includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described below in this
"--Book-Entry Registration" section. Euroclear is operated by Morgan Guaranty
Trust Company of New York, Brussels, Belgium office, under contract with
Euroclear Clearance System, S.C., a Belgian cooperative corporation. All
operations are conducted by the Euroclear Operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
Operator, not ECS. ECS establishes policy for the Euroclear system on behalf of
the more than 120 member organizations of Euroclear. Those member organizations
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 member organization of Euroclear, either directly or
indirectly. Euroclear and Clearstream have established an electronic bridge
between their two systems across which their respective participants may settle
trades with each other.
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The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. It is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Euroclear Terms and Conditions. The Euroclear Terms
and Conditions govern transfers of securities and cash within the Euroclear
system, withdrawal of securities and cash from the Euroclear system, and
receipts of payments with respect to securities in the Euroclear system. All
securities in the Euroclear system are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Euroclear Terms and Conditions only on
behalf of member organizations of Euroclear and has no record of or relationship
with persons holding through those member organizations.
The information in this prospectus concerning DTC, Euroclear and
Clearstream, and their book-entry systems, has been obtained from sources
believed to be reliable, but we do not take any responsibility for the accuracy
or completeness of that information.
HOLDING AND TRANSFERRING BOOK-ENTRY CERTIFICATES. Purchases of
book-entry certificates under the DTC system must be made by or through, and
will be recorded on the records of, the Financial Intermediary that maintains
the beneficial owner's account for that purpose. In turn, the Financial
Intermediary's ownership of those certificates will be recorded on the records
of DTC or, alternatively, if the Financial Intermediary does not maintain an
account with DTC, on the records of a participating firm that acts as agent for
the Financial Intermediary, whose interest will in turn be recorded on the
records of DTC. A beneficial owner of book-entry certificates must rely on the
foregoing procedures to evidence its beneficial ownership of those certificates.
DTC has no knowledge of the actual beneficial owners of the book-entry
certificates. DTC's records reflect only the identity of the direct participants
to whose accounts those certificates are credited, which may or may not be the
actual beneficial owners. The participants in the DTC system will remain
responsible for keeping account of their holdings on behalf of their customers.
Transfers between participants in the DTC system will be effected in
the ordinary manner in accordance with DTC's rules and will be settled in
same-day funds. Transfers between direct account holders at Euroclear and
Clearstream, or between persons or entities participating indirectly in
Euroclear or Clearstream, will be effected in the ordinary manner in accordance
with their respective procedures and in accordance with DTC's rules.
Cross-market transfers between direct participants in DTC, on the one
hand, and member organizations at Euroclear or Clearstream, on the other, will
be effected through DTC in accordance with DTC's rules and the rules of
Euroclear or Clearstream, as applicable. These cross-market transactions will
require, among other things, delivery of instructions by the applicable member
organization to Euroclear or Clearstream, as the case may be, in accordance with
the rules and procedures and within deadlines, Brussels time, established in
Euroclear or Clearstream, as the case may be. If the transaction complies with
all relevant requirements, Euroclear or Clearstream,
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as the case may be, will then deliver instructions to its depositary to take
action to effect final settlement on its behalf.
Because of time-zone differences, the securities account of a member
organization of Euroclear or Clearstream purchasing an interest in a global
certificate from a DTC participant that is not such a member organization, will
be credited during the securities settlement processing day, which must be a
business day for Euroclear or Clearstream, as the case may be, immediately
following the DTC settlement date. Transactions in interests in a book-entry
certificate settled during any securities settlement processing day will be
reported to the relevant member organization of Euroclear or Clearstream on the
same day. Cash received in Euroclear or Clearstream as a result of sales of
interests in a book-entry certificate by or through a member organization of
Euroclear or Clearstream, as the case may be, to a DTC participant that is not
such a member organization will be received with value on the DTC settlement
date, but will not be available in the relevant Euroclear or Clearstream cash
account until the business day following settlement in DTC. The related
prospectus supplement will contain additional information regarding clearance
and settlement procedures for the book-entry certificates and with respect to
tax documentation procedures relating to the book-entry certificates.
Conveyance of notices and other communications by DTC to DTC
participants, and by DTC participants to Financial Intermediaries and beneficial
owners, will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Payments on the book-entry certificates will be made to DTC. DTC's
practice is to credit DTC participants' accounts on the related payment date in
accordance with their respective holdings shown on DTC's records, unless DTC has
reason to believe that it will not receive payment on that date. Disbursement of
those payments by DTC participants to Financial Intermediaries and beneficial
owners will be--
- governed by standing instructions and customary practices, as
is the case with securities held for the accounts of customers
in bearer form or registered in street name, and
- the sole responsibility of each of those DTC participants,
subject to any statutory or regulatory requirements in effect
from time to time.
Under a book-entry system, beneficial owners may receive payments after
the related payment date.
The only "certificateholder" of book-entry certificates will be DTC or
its nominee. Parties to the governing documents for any series of offered
certificates need not recognize beneficial owners of book-entry certificates as
"certificateholders." The beneficial owners of book-entry certificates will be
permitted to exercise the rights of "certificateholders" only indirectly through
the DTC participants, who in turn will exercise their rights through DTC. We
have been informed that DTC will take action permitted to be taken by a
"certificateholder" only at the direction of one or more DTC participants. DTC
may take conflicting actions with respect to the book-entry certificates to the
extent that those actions are taken on behalf of Financial Intermediaries whose
holdings include those certificates.
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Because DTC can act only on behalf of DTC participants, who in turn act
on behalf of Financial Intermediaries and beneficial owners of the applicable
book-entry securities, the ability of a beneficial owner to pledge its interest
in a class of book-entry certificates to persons or entities that do not
participate in the DTC system, or otherwise to take actions with respect to its
interest in a class of book-entry certificates, may be limited due to the lack
of a physical certificate evidencing that interest.
ISSUANCE OF DEFINITIVE CERTIFICATES. Unless we specify otherwise in the
related prospectus supplement, beneficial owners of affected offered
certificates initially issued in book-entry form will not be able to obtain
physical certificates that represent those offered certificates, unless:
- we advise the related trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as
depository with respect to those offered certificates and we
are unable to locate a qualified successor; or
- we elect, at our option, to terminate the book-entry system
through DTC with respect to those offered certificates.
Upon the occurrence of either of the two events described in the prior
paragraph, DTC will be required to notify all DTC participants of the
availability through DTC of physical certificates with respect to the affected
offered certificates. Upon surrender by DTC of the certificate or certificates
representing a class of book-entry offered certificates, together with
instructions for registration, the related trustee or other designated party
will be required to issue to the beneficial owners identified in those
instructions physical certificates representing those offered certificates.
DESCRIPTION OF THE GOVERNING DOCUMENTS
GENERAL
The "Governing Document" for purposes of issuing the offered
certificates of each series will be a pooling and servicing agreement or other
similar agreement or collection of agreements. In general, the parties to the
Governing Document for a series of offered certificates will include us, a
trustee, a master servicer and a special servicer. However, if the related trust
assets include mortgage-backed securities, the Governing Document may include a
manager as a party, but may not include a master servicer, special servicer or
other servicer as a party. We will identify in the related prospectus supplement
the parties to the Governing Document for a series of offered certificates.
If we so specify in the related prospectus supplement, a party from
whom we acquire mortgage assets or one of its affiliates may perform the
functions of master servicer, special servicer or manager for the trust to which
we transfer those assets. If we so specify in the related prospectus supplement,
the same person or entity may act as both master servicer and special servicer
for one of our trusts.
Any party to the Governing Document for a series of offered
certificates, or any of its affiliates, may own certificates issued thereunder.
However, except in limited circumstances, including with respect to required
consents to amendments to the Governing Document for a series of
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offered certificates, certificates that are held by the related master servicer,
special servicer or manager will not be allocated voting rights.
A form of a pooling and servicing agreement has been filed as an
exhibit to the registration statement of which this prospectus is a part.
However, the provisions of the Governing Document for each series of offered
certificates will vary depending upon the nature of the certificates to be
issued thereunder and the nature of the related trust assets. The following
summaries describe select provisions that may appear in the Governing Document
for each series of offered certificates. The prospectus supplement for each
series of offered certificates will provide material additional information
regarding the Governing Document for that series. The summaries in this
prospectus do not purport to be complete, and you should refer to the provisions
of the Governing Document for your offered certificates and, further, to the
description of those provisions in the related prospectus supplement. We will
provide a copy of the Governing Document, exclusive of exhibits, that relates to
your offered certificates, without charge, upon written request addressed to our
principal executive offices specified under "Structured Asset Securities
Corporation."
ASSIGNMENT OF MORTGAGE ASSETS
At the time of initial issuance of any series of offered certificates,
we will assign or cause to be assigned to the designated trustee the mortgage
assets and any other assets to be included in the related trust. We will specify
in the related prospectus all material documents to be delivered, and all other
material actions to be taken, by us or any prior holder of the related mortgage
assets in connection with that assignment. We will also specify in the related
prospectus supplement any remedies available to the related certificateholders,
or the related trustee on their behalf, in the event that any of those material
documents are not delivered or any of those other material actions are not taken
as required. Concurrently with that assignment, the related trustee will deliver
to us or our designee the certificates of that series in exchange for the
mortgage assets and the other assets to be included in the related trust.
Each mortgage asset included in one of our trusts will be identified in
a schedule appearing as an exhibit to the related Governing Document. That
schedule generally will include detailed information about each mortgage asset
transferred to the related trust, including:
1. in the case of a mortgage loan--
2. the address of the related real property and the type of that
property,
3. the mortgage interest rate and, if applicable, the applicable
index, gross margin, adjustment date and any rate cap
information,
4. the remaining term to maturity,
5. the remaining amortization term, and
6. the outstanding principal balance; and
7. in the case of a mortgage-backed security, the outstanding
principal balance and the pass-through rate or coupon rate.
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REPRESENTATIONS AND WARRANTIES WITH RESPECT TO MORTGAGE ASSETS
Unless we state otherwise in the prospectus supplement for any series
of offered certificates, we will, with respect to each mortgage asset in the
related trust, make or assign, or cause to be made or assigned, a limited set of
representations and warranties covering, by way of example:
- the accuracy of the information set forth for each mortgage
asset on the schedule of mortgage assets appearing as an
exhibit to the Governing Document for that series;
- the warranting party's title to each mortgage asset and the
authority of the warranting party to sell that mortgage asset;
and
- in the case of a mortgage loan--
1. the enforceability of the related mortgage note and
mortgage,
2. the existence of title insurance insuring the lien
priority of the related mortgage, and
3. the payment status of the mortgage loan.
We will identify the warranting party, and give a more complete
sampling of the representations and warranties made thereby, in the related
prospectus supplement. We will also specify in the related prospectus supplement
any remedies against the warranting party available to the related
certificateholders, or the related trustee on their behalf, in the event of a
breach of any of those representations and warranties. In most cases, the
warranting party will be a prior holder of the particular mortgage assets.
COLLECTION AND OTHER SERVICING PROCEDURES WITH RESPECT TO MORTGAGE LOANS
The Governing Document for each series of offered certificates will
govern the servicing and administration of any mortgage loans included in the
related trust.
In general, the related master servicer and special servicer, directly
or through sub-servicers, will be obligated to service and administer for the
benefit of the related certificateholders the mortgage loans in any of our
trusts. The master servicer and the special servicer will be required to service
and administer those mortgage loans in accordance with applicable law and,
further, in accordance with the terms of the related Governing Document, the
mortgage loans themselves and any instrument of credit support included in that
trust. Subject to the foregoing, the master servicer and the special servicer
will each have full power and authority to do any and all things in connection
with that servicing and administration that it may deem necessary and desirable.
As part of its servicing duties, each of the master servicer and the
special servicer for one of our trusts will be required to make reasonable
efforts to collect all payments called for under the terms and provisions of the
related mortgage loans that it services. In general, each of the master servicer
and the special servicer for one of our trusts will be obligated to follow the
same collection procedures as it would follow for comparable mortgage loans held
for its own account, provided that:
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- those procedures are consistent with the terms of the related
Governing Document; and
- they do not impair recovery under any instrument of credit
support included in the related trust.
Consistent with the foregoing, the master servicer and the special
servicer will each be permitted, in its discretion, to waive any default charge
in connection with collecting a late payment on any defaulted mortgage loan.
The master servicer and/or the special servicer for one or our trusts,
directly or through sub-servicers, will also be required to perform various
other customary functions of a servicer of comparable loans, including:
- maintaining escrow or impound accounts for the payment of
taxes, insurance premiums, ground rents and similar items, or
otherwise monitoring the timely payment of those items;
- ensuring that the related properties are properly insured;
- attempting to collect delinquent payments;
- supervising foreclosures;
- negotiating modifications;
- responding to borrower requests for partial releases of the
encumbered property, easements, consents to alteration or
demolition and similar matters;
- protecting the interests of certificateholders with respect to
senior lienholders;
- conducting inspections of the related real properties on a
periodic or other basis;
- collecting and evaluating financial statements for the related
real properties;
- managing or overseeing the management of real properties
acquired on behalf of the trust through foreclosure,
deed-in-lieu of foreclosure or otherwise; and
- maintaining servicing records relating to mortgage loans in
the trust.
We will specify in the related prospectus supplement when, and the
extent to which, servicing of a mortgage loan is to be transferred from a master
servicer to a special servicer. In general, a special servicer for any of our
trusts will be responsible for the servicing and administration of:
- mortgage loans that are delinquent with respect to a specified
number of scheduled payments;
- mortgage loans as to which there is a material non-monetary
default;
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- mortgage loans as to which the related borrower has--
1. entered into or consented to bankruptcy, appointment
of a receiver or conservator or similar insolvency
proceeding, or
2. become the subject of a decree or order for such a
proceeding which has remained in force undischarged
or unstayed for a specified number of days; and
- real properties acquired as part of the trust with respect to
defaulted mortgage loans.
The related Governing Document may also may provide that if a default
on a mortgage loan in the related trust has occurred or, in the judgment of the
related master servicer, a payment default is reasonably foreseeable, the
related master servicer may elect to transfer the servicing of that mortgage
loan, in whole or in part, to the related special servicer. When the
circumstances no longer warrant a special servicer's continuing to service a
particular mortgage loan, such as when the related borrower is paying in
accordance with the forbearance arrangement entered into between the special
servicer and that borrower, the master servicer will generally resume the
servicing duties with respect to the particular mortgage loan.
A borrower's failure to make required mortgage loan payments may mean
that operating income from the related real property is insufficient to service
the mortgage debt, or may reflect the diversion of that income from the
servicing of the mortgage debt. In addition, a borrower that is unable to make
mortgage loan payments may also be unable to make timely payment of taxes and
otherwise to maintain and insure the related real property. In general, with
respect to each series of offered certificates, the related special servicer
will be required to monitor any mortgage loan in the related trust that is in
default, evaluate whether the causes of the default can be corrected over a
reasonable period without significant impairment of the value of the related
real property, initiate corrective action in cooperation with the mortgagor if
cure is likely, inspect the related real property and take any other actions as
it deems necessary and appropriate. A significant period of time may elapse
before a special servicer is able to assess the success of any such corrective
action or the need for additional initiatives. The time within which a special
servicer can--
- make the initial determination of appropriate action,
- evaluate the success of corrective action,
- develop additional initiatives,
- institute foreclosure proceedings and actually foreclose, or
- accept a deed to a real property in lieu of foreclosure, on
behalf of the certificateholders of the related series,
may vary considerably depending on the particular mortgage loan, the related
real property, the borrower, the presence of an acceptable party to assume the
mortgage loan and the laws of the jurisdiction in which the related real
property is located. If a borrower files a bankruptcy petition, the
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special servicer may not be permitted to accelerate the maturity of the
defaulted loan or to foreclose on the related real property for a considerable
period of time. See "Certain Legal Aspects of Mortgage Loans--Bankruptcy Laws."
A special servicer for one of our trusts may also perform limited
duties with respect to mortgage loans in that trust for which the related master
servicer is primarily responsible, such as--
- performing property inspections and collecting, and
- evaluating financial statements.
A master servicer for one of our trusts may perform limited duties with
respect to any mortgage loan in that trust for which the related special
servicer is primarily responsible, such as--
- continuing to receive payments on the mortgage loan,
- making calculations with respect to the mortgage loan, and
- making remittances and preparing reports to the related
trustee and/or certificateholders with respect to the mortgage
loan.
The duties of the master servicer and special servicer for your series
will be more fully described in the related prospectus supplement.
Unless we state otherwise in the related prospectus supplement, the
master servicer for your series will be responsible for filing and settling
claims with respect to particular mortgage loans for your series under any
applicable instrument of credit support. See "Description of Credit Support" in
this prospectus.
SUB-SERVICERS
A master servicer or special servicer may delegate its servicing
obligations to one or more third-party servicers or sub-servicers. However,
unless we specify otherwise in the related prospectus supplement, the master
servicer or special servicer will remain obligated under the related Governing
Document. Each sub-servicing agreement between a master servicer or special
servicer, as applicable, and a sub-servicer must provide for servicing of the
applicable mortgage loans consistent with the related Governing Document. Any
master servicer and special servicer for one of our trusts will each be required
to monitor the performance of sub-servicers retained by it.
Unless we specify otherwise in the related prospectus supplement, any
master servicer or special servicer for one of our trusts will be solely liable
for all fees owed by it to any sub-servicer, regardless of whether the master
servicer's or special servicer's compensation under the related Governing
Document is sufficient to pay those fees. Each sub-servicer will be entitled to
reimbursement from the master servicer or special servicer, as the case may be,
that retained it, for expenditures which it makes, generally to the same extent
the master servicer or special servicer would be reimbursed under the related
Governing Document.
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COLLECTION OF PAYMENTS ON MORTGAGE-BACKED SECURITIES
Unless we specify otherwise in the related prospectus supplement, if a
mortgage-backed security is included among the trust assets underlying any
series of offered certificates, then--
- that mortgage-backed security will be registered in the name
of the related trustee or its designee;
- the related trustee will receive payments on that
mortgage-backed security; and
- subject to any conditions described in the related prospectus
supplement, the related trustee or a designated manager will,
on behalf and at the expense of the trust, exercise all rights
and remedies with respect to that mortgaged-backed security,
including the prosecution of any legal action necessary in
connection with any payment default.
MATTERS REGARDING THE MASTER SERVICER, THE SPECIAL SERVICER, THE MANAGER AND US
Unless we specify otherwise in the related prospectus supplement, no
master servicer, special servicer or manager for any of our trusts may resign
from its obligations in that capacity, except upon--
- the appointment of, and the acceptance of that appointment by,
a successor to the resigning party and receipt by the related
trustee of written confirmation from each applicable rating
agency that the resignation and appointment will not result in
a withdrawal or downgrade of any rating assigned by that
rating agency to any class of certificates of the related
series, or
- a determination that those obligations are no longer
permissible under applicable law or are in material conflict
by reason of applicable law with any other activities carried
on by the resigning party.
In general, no resignation will become effective until the related
trustee or other successor has assumed the obligations and duties of the
resigning master servicer, special servicer or manager, as the case may be.
In no event will we, any master servicer, special servicer or manager
for one of our trusts, or any of our or their respective directors, officers,
employees or agents, be under any liability to that trust or the related
certificateholders for any action taken, or not taken, in good faith under the
related Governing Document or for errors in judgment. Neither we nor any of
those other persons or entities will be protected, however, against any
liability that would otherwise be imposed by reason of--
- willful misfeasance, bad faith or gross negligence in the
performance of obligations or duties under the Governing
Document for any series of offered certificates, or
- reckless disregard of those obligations and duties.
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Furthermore, the Governing Document for each series of offered
certificates will entitle us, the master servicer, special servicer and/or
manager for the related trust, and our and their respective directors, officers,
employees and agents, to indemnification out of the related trust assets for any
loss, liability or expense incurred in connection with any legal action that
relates to that Governing Document or series of offered certificates or to the
related trust. The indemnification will not extend, however, to any loss,
liability or expense:
- specifically required to be borne by the relevant party,
without right of reimbursement, under the terms of that
Governing Document;
- incurred in connection with any legal action against the
relevant party resulting from any breach of a representation
or warranty made in that Governing Document; or
- incurred in connection with any legal action against the
relevant party resulting from any willful misfeasance, bad
faith or gross negligence in the performance of obligations or
duties under that Governing Document.
Neither we nor any master servicer, special servicer or manager for the
related trust will be under any obligation to appear in, prosecute or defend any
legal action unless:
- the action is related to the respective responsibilities of
that party under the Governing Document for the affected
series of offered certificates; and
- either--
1. that party is specifically required to bear the
expense of the action, or
2. the action will not, in its opinion, involve that
party in any ultimate expense or liability for which
it would not be reimbursed under the Governing
Document for the affected series of offered
certificates.
However, we and each of those other parties may undertake any legal action that
may be necessary or desirable with respect to the enforcement or protection of
the rights and duties of the parties to the Governing Document for any series of
offered certificates and the interests of the certificateholders of that series
under that Government Document. In that event, the legal expenses and costs of
the action, and any liability resulting from the action, will be expenses, costs
and liabilities of the related trust and payable out of related trust assets.
With limited exception, any person or entity--
- into which we or any related master servicer, special servicer
or manager may be merged or consolidated, or
- resulting from any merger or consolidation to which we or any
related master servicer, special servicer or manager is a
party, or
- succeeding to our business or the business of any related
master servicer, special servicer or manager,
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will be the successor of us or that master servicer, special servicer or
manager, as the case may be, under the Governing Document for a series of
offered certificates.
The compensation arrangements with respect to any master servicer,
special servicer or manager for any of our trusts will be set forth in the
related prospectus supplement. In general, that compensation will be payable out
of the related trust assets.
EVENTS OF DEFAULT
We will identify in related prospectus supplement the various events of
default under the Governing Document for each series of offered certificates for
which any related master servicer, special servicer or manager may be terminated
in that capacity.
AMENDMENT
The Governing Document for each series of offered certificates may be
amended by the parties thereto, without the consent of any of the holders of
those certificates, or of any non-offered certificates of the same series, for
the following reasons:
1. to cure any ambiguity;
2. to correct, modify or supplement any provision in the
Governing Document which may be inconsistent with any other
provision in that document or with the description of that
document set forth in the related prospectus supplement;
3. to add any other provisions with respect to matters or
questions arising under the Governing Document that are not
inconsistent with the existing provisions of that document;
4. to the extent applicable, to relax or eliminate any
requirement under the Governing Document imposed by the
provisions of the Internal Revenue Code of 1986 relating to
REMICs if the provisions of that Code are amended or clarified
so as to allow for the relaxation or elimination of that
requirement;
5. to relax or eliminate any requirement under the Governing
Document imposed by the Securities Act of 1933, as amended, or
the rules under that Act if that Act or those rules are
amended or clarified so as to allow for the relaxation or
elimination of that requirement;
6. to comply with any requirements imposed by the Internal
Revenue Code of 1986 or any final, temporary or, in some
cases, proposed regulation, revenue ruling, revenue procedure
or other written official announcement or interpretation
relating to federal income tax laws, or to avoid a prohibited
transaction or reduce the incidence of any tax that would
arise from any actions taken with respect to the operation of
any REMIC created under the Governing Document;
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7. to the extent applicable, to modify, add to or eliminate the
transfer restrictions relating to the certificates which are
residual interests in a REMIC; or
8. to otherwise modify or delete existing provisions of the
Governing Document.
However, no amendment of the Governing Document for any series of
offered certificates, covered solely by clauses 3. or 8. above, may adversely
affect in any material respect the interests of any holders of offered or
non-offered certificates of that series.
In general, the Governing Document for a series of offered certificates
may also be amended by the parties to that document, with the consent of the
holders of offered and non-offered certificates representing, in total, not less
than 66-2/3%, or any other percentage specified in the related prospectus
supplement, of all the voting rights allocated to those classes of that series
that are affected by the amendment. However, the Governing Document for a series
of offered certificates may not be amended to--
- reduce in any manner the amount of, or delay the timing of,
payments received on the related mortgage assets which are
required to be distributed on any offered or non-offered
certificate of that series without the consent of the holder
of that certificate; or
- adversely affect in any material respect the interests of the
holders of any class of offered or non-offered certificates of
that series in any other manner without the consent of the
holders of all certificates of that class; or
- modify the provisions of the Governing Document relating to
amendments of that document without the consent of the holders
of all offered and non-offered certificates of that series
then outstanding.
LIST OF CERTIFICATEHOLDERS
Upon written request of three or more certificateholders of record of
any series made for purposes of communicating with other holders of certificates
of the same series with respect to their rights under the related Governing
Document, the related trustee or other certificate registrar of that series will
afford the requesting certificateholders access during normal business hours to
the most recent list of certificateholders of that series. However, the trustee
may first require a copy of the communication that the requesting
certificateholders proposed to send.
THE TRUSTEE
The trustee for each series of offered certificates will be named in
the related prospectus supplement. The commercial bank, national banking
association, banking corporation or trust company that serves as trustee for any
series of offered certificates may have typical banking relationships with the
us and our affiliates and with any of the other parties to the related Governing
Document and its affiliates.
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DUTIES OF THE TRUSTEE
The trustee for each series of offered certificates will not--
- make any representation as to the validity or sufficiency of
those certificates, the related Governing Document or any
underlying mortgage asset or related document, or
- be accountable for the use or application by or on behalf of
any other party to the related Governing Document of any funds
paid to that party with respect to those certificates or the
underlying mortgage assets.
If no event of default has occurred and is continuing under the related
Governing Document, the trustee for each series of offered certificates will be
required to perform only those duties specifically required under the related
Governing Document. However, upon receipt of any of the various certificates,
reports or other instruments required to be furnished to it under the related
Governing Document, the trustee must examine those documents and determine
whether they conform to the requirements of that Governing Document.
MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related prospectus supplement,
the fees and normal disbursements of the trustee for any series of offered
certificates may be the expense of the related master servicer or other
specified person or may be required to be paid by the related trust assets.
The trustee for each series of offered certificates will be entitled to
indemnification, out of related trust assets, for any loss, liability or expense
incurred by that trustee in connection with its acceptance or administration of
its trusts under the related Governing Document. However, the indemnification of
a trustee will not extend to any loss, liability or expense incurred by reason
of willful misfeasance, bad faith or gross negligence on the part of the trustee
in the performance of its obligations and duties under the related Governing
Document.
No trustee for any series of offered certificates will be required to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties under the related Governing Document, or in the
exercise of any of its rights or powers, if it has reasonable grounds for
believing that repayment of those funds or adequate indemnity against that risk
or liability is not reasonably assured to it.
The trustee for each series of offered certificates will be entitled to
execute any of its trusts or powers and perform any of its duties under the
related Governing Document, either directly or by or through agents or
attorneys. The trustee will not be responsible for any willful misconduct or
gross negligence on the part of any such agent or attorney appointed by it with
due care.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The trustee for any series of offered certificates may resign at any
time. We will be obligated to appoint a successor to a resigning trustee. We may
also remove the trustee for any series of offered certificates if that trustee
ceases to be eligible to continue as such under the related Governing Document
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or if that trustee becomes insolvent. Unless we indicate otherwise in the
related prospectus supplement, the trustee for any series of offered
certificates may also be removed at any time by the holders of the offered and
non-offered certificates of that series evidencing not less than 51%, or any
other percentage specified in the related prospectus supplement, of the voting
rights for that series. However, if the removal was without cause, the
certificateholders effecting the removal may be responsible for any costs and
expenses incurred by the terminated trustee in connection with its removal. Any
resignation or removal of a trustee and appointment of a successor trustee will
not become effective until acceptance of the appointment by the successor
trustee.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
Credit support may be provided with respect to one or more classes of
the offered certificates of any series or with respect to the related mortgage
assets. That credit support may be in the form of any of the following:
- the subordination of one or more other classes of certificates
of the same series;
- the use of a letter of credit, a surety bond, an insurance
policy, a guarantee or a credit derivative;
- the establishment of one or more reserve funds; or
- any combination of the foregoing.
If and to the extent described in the related prospectus supplement,
any of the above forms of credit support may provide credit enhancement for
non-offered certificates, as well as offered certificates, or for more than one
series of certificates.
If you are the beneficiary of any particular form of credit support,
that credit support may not protect you against all risks of loss and will not
guarantee payment to you of all amounts to which you are entitled under your
offered certificates. If losses or shortfalls occur that exceed the amount
covered by that credit support or that are of a type not covered by that credit
support, you will bear your allocable share of deficiencies. Moreover, if that
credit support covers the offered certificates of more than one class or series
and total losses on the related mortgage assets exceed the amount of that credit
support, it is possible that the holders of offered certificates of other
classes and/or series will be disproportionately benefited by that credit
support to your detriment.
If you are the beneficiary of any particular form of credit support, we
will include in the related prospectus supplement a description of the
following:
- the nature and amount of coverage under that credit support;
- any conditions to payment not otherwise described in this
prospectus;
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- any conditions under which the amount of coverage under that
credit support may be reduced and under which that credit
support may be terminated or replaced; and
- the material provisions relating to that credit support.
Additionally, we will set forth in the related prospectus supplement
information with respect to the obligor, if any, under any instrument of credit
support.
SUBORDINATE CERTIFICATES
If and to the extent described in the related prospectus supplement,
one or more classes of certificates of any series may be subordinate to one or
more other classes of certificates of that series. If you purchase subordinate
certificates, your right to receive payments out of collections and advances on
the related trust assets on any payment date will be subordinated to the
corresponding rights of the holders of the more senior classes of certificates.
If and to the extent described in the related prospectus supplement, the
subordination of a class of certificates may not cover all types of losses or
shortfalls. In the related prospectus supplement, we will set forth information
concerning the method and amount of subordination provided by a class or classes
of subordinate certificates in a series and the circumstances under which that
subordination will be available.
If the mortgage assets in any trust established us are divided into
separate groups, each supporting a separate class or classes of certificates of
the related series, credit support may be provided by cross-support provisions
requiring that payments be made on senior certificates evidencing interests in
one group of those mortgage assets prior to payments on subordinate certificates
evidencing interests in a different group of those mortgage assets. We will
describe in the related prospectus supplement the manner and conditions for
applying any cross-support provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO MORTGAGE LOANS
The mortgage loans included in any trust established by us may be
covered for some default risks by insurance policies or guarantees. If so, we
will describe in the related prospectus supplement the nature of those default
risks and the extent of that coverage.
LETTER OF CREDIT
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered certificates or
select classes of those certificates will be covered by one or more letters of
credit, issued by a bank or other financial institution specified in the related
prospectus supplement. The issuer of a letter of credit will be obligated to
honor draws under that letter of credit in a total fixed dollar amount, net
of unreimbursed payments under the letter of credit, generally equal to a
percentage specified in the related prospectus supplement of the total
principal balance of some or all of the related mortgage assets as of the
date the related trust was formed or of the initial total principal balance
of one or more classes of certificates of the applicable series. The letter
of credit may permit draws only in the event of select 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 letter of credit issuer under the letter of credit for
any series
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of offered certificates will expire at the earlier of the date specified in the
related prospectus supplement or the termination of the related trust.
CERTIFICATE INSURANCE AND SURETY BONDS
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered certificates or
select classes of those certificates will be covered by insurance policies or
surety bonds provided by one or more insurance companies or sureties. Those
instruments may cover, with respect to one or more classes of the offered
certificates of the related series, timely payments of interest and principal or
timely payments of interest and payments of principal on the basis of a schedule
of principal payments set forth in or determined in the manner specified in the
related prospectus supplement. We will describe in the related prospectus
supplement any limitations on the draws that may be made under any of those
instruments.
CREDIT DERIVATIVE
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered certificates or
select classes of those certificates will be covered by credit derivatives, such
as credit default swaps and total return swaps. A credit derivative is a
financial instrument designed to offset losses and shortfalls derived from the
credit risk of an underlying or reference asset or the credit risk of an
underlying or reference credit. We will describe in the related prospectus
supplement when and how payments are made under the particular instrument and
the specific credit risk that is being covered.
RESERVE FUNDS
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered certificates or
select classes of those certificates will be covered, to the extent of available
funds, by one or more reserve funds in which cash, a letter of credit, permitted
investments, a demand note or a combination of the foregoing, will be deposited,
in the amounts specified in the related prospectus supplement. If and to the
extent described in the related prospectus supplement, the reserve fund for the
related series of offered certificates may also be funded over time.
Amounts on deposit in any reserve fund for a series of offered
certificates will be applied for the purposes, in the manner, and to the extent
specified in the related prospectus supplement. If and to the extent described
in the related prospectus supplement, reserve funds may be established to
provide protection only against select types of losses and shortfalls. Following
each payment date for the related series of offered certificates, amounts in a
reserve fund in excess of any required balance may be released from the reserve
fund under the conditions and to the extent specified in the related prospectus
supplement.
CREDIT SUPPORT WITH RESPECT TO MBS
If and to the extent described in the related prospectus supplement,
any mortgage-backed security included in one of our trusts and/or the mortgage
loans that back that security may be covered by one or more of the types of
credit support described in this prospectus. We will specify in the related
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prospectus supplement, as to each of those forms of credit support, the
information indicated above with respect to that mortgage-backed security, to
the extent that the information is material and available.
LEGAL ASPECTS OF MORTGAGE LOANS
Most, if not all, of the mortgage loans underlying a series of offered
certificates will be secured by multifamily and commercial properties in the
United States, its territories and possessions. However, some of those mortgage
loans may be secured by multifamily and commercial properties outside the United
States, its territories and possessions.
The following discussion contains general summaries of select legal
aspects of mortgage loans secured by multifamily and commercial properties in
the United States. Because these legal aspects are governed by applicable state
law, which may differ substantially from state to state, the summaries do not
purport to be complete, to reflect the laws of any particular state, or to
encompass the laws of all jurisdictions in which the security for the mortgage
loans underlying the offered certificates is situated. Accordingly, you should
be aware that the summaries are qualified in their entirety by reference to the
applicable laws of those states. See "Description of the Trust Assets--Mortgage
Loans."
If a significant percentage of mortgage loans underlying a series of
offered certificates, are secured by properties in a particular state, we will
discuss the relevant state laws, to the extent they vary materially from this
discussion, in the related prospectus supplement.
GENERAL
Each mortgage loan underlying a series of offered certificates will be
evidenced by a note or bond and secured by an instrument granting a security
interest in real property. The instrument granting a security interest in real
property may be a mortgage, deed of trust or a deed to secure debt, depending
upon the prevailing practice and law in the state in which that real property is
located. Mortgages, deeds of trust and deeds to secure debt are often
collectively referred to in this prospectus as "mortgages." A mortgage creates a
lien upon, or grants a title interest in, the real property covered by the
mortgage, and represents the security for the repayment of the indebtedness
customarily evidenced by a promissory note. The priority of the lien created or
interest granted will depend on--
- the terms of the mortgage,
- the terms of separate subordination agreements or
intercreditor agreements with others that hold interests in
the real property,
- the knowledge of the parties to the mortgage, and
- in general, the order of recordation of the mortgage in the
appropriate public recording office.
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However, the lien of a recorded mortgage will generally be subordinate
to later-arising liens for real estate taxes and assessments and other charges
imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage--
- a mortgagor, who is the owner of the encumbered interest in
the real property, and
- a mortgagee, who is the lender.
In general, the mortgagor is also the borrower.
In contrast, a deed of trust is a three-party instrument. The parties
to a deed of trust are--
- the trustor, who is the equivalent of a mortgagor,
- the trustee to whom the real property is conveyed, and
- the beneficiary for whose benefit the conveyance is made, who
is the lender.
Under a deed of trust, the trustor grants the property, irrevocably
until the debt is paid, in trust and generally with a power of sale, to the
trustee to secure repayment of the indebtedness evidenced by the related note.
A deed to secure debt typically has two parties. Under a deed to secure
debt, the grantor, who is the equivalent of a mortgagor, conveys title to the
real property to the grantee, who is the lender, generally with a power of sale,
until the debt is repaid.
Where the borrower is a land trust, there would be an additional party
because legal title to the property is held by a land trustee under a land trust
agreement for the benefit of the borrower. At origination of a mortgage loan
involving a land trust, the borrower may execute a separate undertaking to make
payments on the mortgage note. In no event is the land trustee personally liable
for the mortgage note obligation.
The mortgagee's authority under a mortgage, the trustee's authority
under a deed of trust and the grantee's authority under a deed to secure debt
are governed by:
- the express provisions of the related instrument,
- the law of the state in which the real property is located,
- various federal laws, and
- in some deed of trust transactions, the directions of the
beneficiary.
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LEASES AND RENTS
A mortgage that encumbers an income-producing property often contains
an assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases. Under an assignment of rents and leases, the
borrower assigns to the lender the borrower's right, title and interest as
landlord under each lease and the income derived from each lease. However, the
borrower retains a revocable license to collect the rents, provided there is no
default and the rents are not directly paid to the lender. If the borrower
defaults, the license terminates and the lender is entitled to collect the
rents. Local law may require that the lender take possession of the property
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. Room rates are generally pledged by the borrower as
additional security for the loan when a mortgage loan is secured by a hotel or
motel. In general, the lender must file financing statements in order to perfect
its security interest in the room rates and must file continuation statements,
generally every five years, to maintain that perfection. Mortgage loans secured
by hotels or motels may be included in one of our trusts even if the security
interest in the room rates was not perfected or the requisite UCC filings were
allowed to lapse. A lender will generally be required to commence a foreclosure
action or otherwise take possession of the property in order to enforce its
rights to collect the room rates following a default, even if the lender's
security interest in room rates is perfected under applicable nonbankruptcy law.
In the bankruptcy setting, the lender will be stayed from enforcing its
rights to collect hotel and motel room rates. However, the room rates will
constitute cash collateral and cannot be used by the bankrupt borrower--
- without a hearing or the lender's consent, or
- unless the lender's interest in the room rates is given
adequate protection.
For purposes of the foregoing, the adequate protection may include a cash
payment for otherwise encumbered funds or a replacement lien on unencumbered
property, in either case equal in value to the amount of room rates that the
bankrupt borrower proposes to use. See "--Bankruptcy Laws" below.
PERSONALTY
Some types of income-producing real properties, such as hotels, motels
and nursing homes, may include personal property, which may, to the extent it is
owned by the borrower and not previously pledged, constitute a significant
portion of the property's value as security. The creation and enforcement of
liens on personal property are governed by the UCC. Accordingly, if a borrower
pledges personal property as security for a mortgage loan, the lender generally
must file UCC financing statements in order to perfect its security interest in
the personal property and must file continuation statements, generally every
five years, to maintain that perfection. Mortgage loans secured in part by
personal property may be included in one of our trusts even if the security
interest in the personal property was not perfected or the requisite UCC filings
were allowed to lapse.
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FORECLOSURE
GENERAL. Foreclosure is a legal procedure that allows the lender to
recover its mortgage debt by enforcing its rights and available legal remedies
under the mortgage. If the borrower defaults in payment or performance of its
obligations under the note or mortgage, the lender has the right to institute
foreclosure proceedings to sell the real property security at public auction to
satisfy the indebtedness.
FORECLOSURE PROCEDURES VARY FROM STATE TO STATE. The two primary
methods of foreclosing a mortgage are--
- judicial foreclosure, involving court proceedings, and
- nonjudicial foreclosure under a power of sale granted in the
mortgage instrument.
Other foreclosure procedures are available in some states, but they are
either infrequently used or available only in limited circumstances.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses are raised or counterclaims are interposed. A
foreclosure action sometimes requires several years to complete.
JUDICIAL FORECLOSURE. A judicial foreclosure proceeding is conducted in
a court having jurisdiction over the mortgaged property. Generally, a lender
initiates the action 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. The court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property upon successful completion of a
judicial foreclosure proceeding. The proceeds of that public sale are used to
satisfy the judgment. The procedures that govern these public sales vary from
state to state.
EQUITABLE AND OTHER LIMITATIONS ON ENFORCEABILITY OF PARTICULAR
PROVISIONS. United States courts have traditionally imposed general equitable
principles to limit the remedies available to lenders in foreclosure actions.
These principles are generally designed to relieve borrowers from the effects of
mortgage defaults perceived as harsh or unfair. Relying on these 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;
- require the lender to undertake affirmative actions to
determine the cause of the borrower's default and the
likelihood that the borrower will be able to reinstate the
loan;
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- require the lender to reinstate a loan or recast a payment
schedule in order to accommodate a borrower that is suffering
from a temporary financial disability; or
- limit the right of the lender to foreclose in the case of a
nonmonetary default, such as--
1. a failure to adequately maintain the mortgaged
property, or
2. an impermissible further encumbrance of the mortgaged
property.
Some courts have addressed the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have--
- upheld the reasonableness of the notice provisions, or
- found that a public sale under a mortgage providing for a
power of sale does not involve sufficient state action to
trigger constitutional protections.
In addition, some states may have statutory protection such as the
right of the borrower to reinstate its mortgage loan after commencement of
foreclosure proceedings but prior to a foreclosure sale.
NONJUDICIAL FORECLOSURE/POWER OF SALE. In states permitting nonjudicial
foreclosure proceedings, foreclosure of a deed of trust is generally
accomplished by a nonjudicial trustee's sale under a power of sale typically
granted in the deed of trust. A power of sale may also be contained in any other
type of mortgage instrument if applicable law so permits. A power of sale under
a deed of trust allows a nonjudicial public sale to be conducted generally
following--
- a request from the beneficiary/lender to the trustee to sell
the property upon default by the borrower, and
- notice of sale is given in accordance with the terms of the
deed of trust and applicable state law.
In some states, prior to a nonjudicial public sale, the trustee under
the deed of trust must--
- record a notice of default and notice of sale, and
- send a copy of those notices to the borrower and to any other
party who has recorded a request for a copy of them.
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. Some states require a
reinstatement period during which the borrower or junior lienholder may have the
right to cure the default by paying the entire actual amount in arrears, without
regard to the acceleration of the indebtedness, plus the lender's expenses
incurred in enforcing the obligation. In other states, the
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borrower or the junior lienholder has only the right to pay off the entire debt
to prevent the foreclosure sale. Generally, state law governs the procedure for
public sale, the parties entitled to notice, the method of giving notice and the
applicable time periods.
PUBLIC SALE. A third party may be unwilling to purchase a mortgaged
property at a public sale because of--
- the difficulty in determining the exact status of title to the
property due to, among other things, redemption rights that
may exist, and
- the possibility that physical deterioration of the property
may have occurred during the foreclosure proceedings.
As a result of the foregoing, it is common for the lender to purchase
the mortgaged property and become its owner, subject to the borrower's right in
some states to remain in possession during a redemption period. In that case,
the lender will have both the benefits and burdens of ownership, including the
obligation to pay debt service on any senior mortgages, to pay taxes, to obtain
casualty insurance and to make repairs necessary to render the property suitable
for sale. The costs of operating and maintaining a commercial or multifamily
residential property may be significant and may be greater than the income
derived from that property. The lender also will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
or lease of the property. Whether, the ultimate proceeds of the sale of the
property equal the lender's investment in the property depends upon market
conditions. Moreover, because of the expenses associated with acquiring, owning
and selling a mortgaged property, a lender could realize an overall loss on the
related mortgage loan even if the mortgaged property is sold at foreclosure, or
resold after it is acquired through foreclosure, for an amount equal to the full
outstanding principal amount of the loan plus accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens. In addition, it
may be obliged to keep senior mortgage loans current in order to avoid
foreclosure of its interest in the property. Furthermore, if the foreclosure of
a junior mortgage triggers the enforcement of a due-on-sale clause contained in
a senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
RIGHTS OF REDEMPTION. The purposes of a foreclosure action are--
- to enable the lender to realize upon its security, and
- to bar the borrower, and all persons who have interests in the
property that are subordinate to that of the foreclosing
lender, from exercising their equity of redemption.
The doctrine of equity of redemption provides that, until the property
encumbered by a mortgage has been sold in accordance with a properly conducted
foreclosure and foreclosure sale, those having interests that are subordinate to
that of the foreclosing lender have an equity of redemption and may redeem the
property by paying the entire debt with interest. Those having an equity of
redemption must
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generally be made parties to the foreclosure proceeding in order for their
equity of redemption to be terminated.
The equity of redemption is a common-law, nonstatutory right which
should be distinguished from post-sale statutory rights of redemption. In some
states, the borrower and foreclosed junior lienors are given a statutory period
in which to redeem the property after sale under a deed of trust or foreclosure
of a mortgage. In some states, statutory redemption may occur only upon payment
of the foreclosure sale price. In other states, redemption may be permitted if
the former borrower pays only a portion of the sums due. A statutory right of
redemption will diminish the ability of the lender to sell the foreclosed
property because the exercise of a right of redemption would defeat the title of
any purchaser through a foreclosure. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership until the redemption period has expired. In some states, a
post-sale statutory right of redemption may exist following a judicial
foreclosure, but not following a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION. Some or all of the mortgage loans
underlying a series of offered certificates may be nonrecourse loans. Recourse
in the case of a default on a non-recourse mortgage loan will be limited to the
mortgaged property and any other assets that were pledged to secure the mortgage
loan. However, even if a mortgage loan by its terms provides for recourse to the
borrower's other assets, a lender's ability to realize upon those assets may be
limited by state law. For example, in some states, a lender cannot obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal to the difference between the net amount realized upon the public
sale of the real property and the amount due to the lender. Other statutes may
require the lender to exhaust the security afforded under a mortgage before
bringing a personal action against the borrower. In other states, the lender has
the option of bringing a personal action against the borrower on the debt
without first exhausting the security, but in doing so, the lender may be deemed
to have elected a remedy and thus may be precluded from foreclosing upon the
security. Consequently, lenders will usually proceed first against the security
in states where an election of remedy provision exists. Finally, other statutory
provisions limit any deficiency judgment to the excess of the outstanding debt
over the fair market value of the property at the time of the sale. These other
statutory provisions are intended to protect borrowers from exposure to large
deficiency judgments that might result from bidding at below-market values at
the foreclosure sale.
LEASEHOLD CONSIDERATIONS. Some or all of the mortgage loans underlying
a series of offered certificates may be secured by a mortgage on the borrower's
leasehold interest under a ground lease. Leasehold mortgage loans are subject to
some risks not associated with mortgage loans secured by a lien on the fee
estate of the borrower. The most significant of these risks is that if the
borrower's leasehold were to be terminated upon a lease default, the leasehold
mortgagee would lose its security. This risk may be lessened if the ground
lease:
- requires the lessor to give the leasehold mortgagee notices 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
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- contains other protective provisions typically required by
prudent lenders to be included in a ground lease.
Some mortgage loans underlying a series of offered certificates,
however, may be secured by ground leases which do not contain these provisions.
COOPERATIVE SHARES. Some or all of the mortgage loans underlying a
series of offered certificates may be secured by a security interest on the
borrower's ownership interest in shares, and the proprietary leases belonging to
those shares, allocable to cooperative dwelling units that may be vacant or
occupied by nonowner tenants. Loans secured in this manner are subject to some
risks not associated with mortgage loans secured by a lien on the fee estate of
a borrower in real property. Loans secured in this manner typically are
subordinate to the mortgage, if any, on the cooperative's building. That
mortgage, if foreclosed, could extinguish the equity in the building and the
proprietary leases of the dwelling units derived from ownership of the shares of
the cooperative. Further, transfer of shares in a cooperative is subject to
various regulations as well as to restrictions under the governing documents of
the cooperative. The shares may be canceled in the event that associated
maintenance charges due under the related proprietary leases are not paid.
Typically, a recognition agreement between the lender and the cooperative
provides, among other things, that the lender may cure a default under a
proprietary lease.
Under the laws applicable in many states, "foreclosure" on cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the UCC and the security agreement relating to the shares. Article 9 of the
UCC requires that a sale be conducted in a commercially reasonable manner, which
may be dependent upon, among other things, the notice given the debtor and the
method, manner, time, place and terms of the sale. Article 9 of the UCC provides
that the proceeds of the sale will be applied first to pay the costs and
expenses of the sale and then to satisfy the indebtedness secured by the
lender's security interest. A recognition agreement, however, generally provides
that the lender's right to reimbursement is subject to the right of the
cooperative corporation to receive sums due under the proprietary leases.
BANKRUPTCY LAWS
Operation of the U.S. Bankruptcy Code and related state laws may
interfere with or affect the ability of a lender to realize upon collateral or
to enforce a deficiency judgment. For example, under the U.S. Bankruptcy Code,
virtually all actions, including foreclosure actions and deficiency judgment
proceedings, to collect a debt are automatically stayed upon the filing of the
bankruptcy petition. Often, no interest or principal payments are made during
the course of the bankruptcy case. The delay caused by an automatic stay and its
consequences can be significant. Also, under the U.S. Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a junior lienor may stay
the senior lender from taking action to foreclose out the junior lien.
Under the U.S. Bankruptcy Code, the amount and terms of a mortgage loan
secured by a lien on property of the debtor may be modified provided that
substantive and procedural safeguards protective of the lender are met. A
bankruptcy court may, among other things--
- reduce the secured portion of the outstanding amount of the
loan to the then-current value of the property, thereby
leaving the lender a general unsecured creditor for
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the difference between the then-current value of the property
and the outstanding balance of the loan;
- reduce the amount of each scheduled payment, by means of a
reduction in the rate of interest and/or an alteration of the
repayment schedule, with or without affecting the unpaid
principal balance of the loan;
- extend or shorten the term to maturity of the loan;
- permit the bankrupt borrower to cure of the subject loan
default by paying the arrearage over a number of years; or
- permit the bankrupt borrower, through its rehabilitative plan,
to reinstate the loan payment schedule even if the lender has
obtained a final judgment of foreclosure prior to the filing
of the debtor's petition.
Federal bankruptcy law may also interfere with or affect the ability of
a secured lender to enforce the borrower's assignment of rents and leases
related to the mortgaged property. A lender may be stayed from enforcing the
assignment under the U.S. Bankruptcy Code. In addition, the legal proceedings
necessary to resolve the issue could be time-consuming, and result in delays in
the lender's receipt of the rents. However, recent amendments to the U.S.
Bankruptcy Code may minimize the impairment of the lender's ability to enforce
the borrower's assignment of rents and leases. In addition to the inclusion of
hotel revenues within the definition of cash collateral as noted above, the
amendments provide that a pre-petition security interest in rents or hotel
revenues is designed to overcome those cases holding that a security interest in
rents is unperfected under the laws of some states until the lender has taken
some further action, such as commencing foreclosure or obtaining a receiver
prior to activation of the assignment of rents.
A borrower's ability to make payment on a mortgage loan may be impaired
by the commencement of a bankruptcy case relating to the tenant under a lease of
the related property. Under the U.S. Bankruptcy Code, the filing of a petition
in bankruptcy by or on behalf of a tenant results in a stay in bankruptcy
against the commencement or continuation of any state court proceeding for--
- past due rent,
- accelerated rent,
- damages, or
- a summary eviction order with respect to a default under the
lease that occurred prior to the filing of the tenant's
bankruptcy petition.
In addition, the U.S. Bankruptcy Code generally provides that a trustee
or debtor-in-possession may, subject to approval of the court:
- assume the lease and either retain it or assign it to a third
party, or
- reject the lease.
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If the lease is assumed, the trustee, debtor-in-possession or assignee,
if applicable, must cure any defaults under the lease, compensate the lessor for
its losses and provide the lessor with adequate assurance of future performance.
These remedies may be insufficient, and any assurances provided to the lessor
may be inadequate. If the lease is rejected, the lessor will be treated, except
potentially to the extent of any security deposit, as an unsecured creditor with
respect to its claim for damages for termination of the lease. The U.S.
Bankruptcy Code also limits a lessor's damages for lease rejection to:
- the rent reserved by the lease without regard to acceleration
for the greater of one year, or 15%, not to exceed three
years, of the remaining term of the lease, plus
- unpaid rent to the earlier of the surrender of the property or
the lessee's bankruptcy filing.
ENVIRONMENTAL CONSIDERATIONS
GENERAL. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties that
are or have been used for industrial, manufacturing, military or disposal
activity. Those environmental risks include the possible diminution of the value
of a contaminated property or, as discussed below, potential liability for
clean-up costs or other remedial actions that could exceed the value of the
property or the amount of the lender's loan. In some circumstances, a lender may
decide to abandon a contaminated real property as collateral for its loan rather
than foreclose and risk liability for clean-up costs.
SUPERLIEN LAWS. Under the laws of many states, contamination on a
property may give rise to a lien on the property for clean-up costs. In several
states, that lien has priority over all existing liens, including those of
existing mortgages. In these states, the lien of a mortgage may lose its
priority to that superlien.
CERCLA. The federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, imposes strict liability on present and
past "owners" and "operators" of contaminated real property for the costs of
clean-up. A secured lender may be liable as an "owner" or "operator" of a
contaminated mortgaged property if agents or employees of the lender have
participated in the management of the property or the operations of the
borrower. Liability may exist even if the lender did not cause or contribute to
the contamination and regardless of whether the lender has actually taken
possession of the contaminated mortgaged property through foreclosure, deed in
lieu of foreclosure or otherwise. Moreover, liability is not limited to the
original or unamortized principal balance of a loan or to the value of the
property securing a loan. Excluded from CERCLA's definition of "owner" or
"operator," however, is a person who, without participating in the management of
the facility, holds indicia of ownership primarily to protect his security
interest. This is the so called "secured creditor exemption."
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 amended, among other things, the provisions of CERCLA with respect to
lender liability and the secured creditor exemption. The Lender Liability Act
offers substantial protection to lenders by defining the activities in which a
lender can engage and still have the benefit of the secured creditor exemption.
In order for a lender to be deemed to have participated in the management of a
mortgaged
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property, the lender must actually participate in the operational affairs of the
property of the borrower. The Lender Liability Act provides that "merely having
the capacity to influence, or unexercised right to control" operations does not
constitute participation in management. A lender will lose the protection of the
secured creditor exemption only if--
- it exercises decision-making control over a borrower's
environmental compliance and hazardous substance handling and
disposal practices, or
- assumes day-to-day management of operational functions of a
mortgaged property.
The Lender Liability Act also provides that a lender will continue to
have the benefit of the secured creditor exemption even if it forecloses on a
mortgaged property, purchases it at a foreclosure sale or accepts a deed-in-lieu
of foreclosure, provided that the lender seeks to sell that property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
OTHER FEDERAL AND STATE LAWS. Many states have statutes similar to
CERCLA, and not all those statutes provide for a secured creditor exemption.
In addition, under federal law, there is potential liability relating to
hazardous wastes and underground storage tanks under the federal Resource
Conservation and Recovery Act.
Some federal, state and local laws, regulations and ordinances govern
the management, removal, encapsulation or disturbance of asbestos-containing
materials. These laws, as well as common law standards, may--
- impose liability for releases of or exposure to
asbestos-containing materials, and
- provide for third parties to seek recovery from owners or
operators of real properties for personal injuries associated
with those releases.
Recent federal legislation will require owners of residential housing
constructed prior to 1978 to disclose to potential residents or purchasers any
known lead-based paint hazards and will impose treble damages for any failure to
disclose. In addition, the ingestion of lead-based paint chips or dust particles
by children can result in lead poisoning. If lead-based paint hazards exist at a
property, then the owner of that property may be held liable for injuries and
for the costs of removal or encapsulation of the lead-based paint.
In a few states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. In these cases, a lender that
becomes the owner of a property through foreclosure, deed in lieu of foreclosure
or otherwise, may be required to clean up the contamination before selling or
otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law
causes of action related to hazardous environmental conditions on a property,
such as actions based on nuisance or on toxic tort resulting in death, personal
injury or damage to property. While it may be more difficult to hold a lender
liable under common law causes of action, unanticipated or uninsured liabilities
of the borrower may jeopardize the borrower's ability to meet its loan
obligations.
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Federal, state and local environmental regulatory requirements change
often. It is possible that compliance with a new regulatory requirement could
impose significant compliance costs on a borrower. These costs may jeopardize
the borrower's ability to meet its loan obligations.
ADDITIONAL CONSIDERATIONS. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable, it
can bring an action for contribution against the owner or operator who created
the environmental hazard. However, that individual or entity may be without
substantial assets. Accordingly, it is possible that the costs could become a
liability of the related trust and occasion a loss to the related
certificateholders.
If the operations on a foreclosed property are subject to environmental
laws and regulations, the lender will be required to operate the property in
accordance with those laws and regulations. This compliance may entail
substantial expense, especially in the case of industrial or manufacturing
properties.
In addition, a lender may be obligated to disclose environmental
conditions on a property to government entities and/or to prospective buyers,
including prospective buyers at a foreclosure sale or following foreclosure.
This disclosure may decrease the amount that prospective buyers are willing to
pay for the affected property, sometimes substantially.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Some or all of the mortgage loans underlying a series of offered
certificates may contain due-on-sale and due-on-encumbrance clauses that purport
to permit the lender to accelerate the maturity of the loan if the borrower
transfers or encumbers the a mortgaged property. In recent years, court
decisions and legislative actions placed substantial restrictions on the right
of lenders to enforce these clauses in many states. However, the Garn-St Germain
Depository Institutions Act of 1982 generally preempts state laws that prohibit
the enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to the limitations prescribed in
that Act and the regulations promulgated thereunder.
JUNIOR LIENS; RIGHTS OF HOLDERS OF SENIOR LIENS
Any of our trusts may include mortgage loans secured by junior liens,
while the loans secured by the related senior liens may not be included in that
trust. The primary risk to holders of mortgage loans secured by junior liens is
the possibility that adequate funds will not be received in connection with a
foreclosure of the related senior liens to satisfy fully both the senior loans
and the junior loan.
In the event that a holder of a senior lien forecloses on a mortgaged
property, the proceeds of the foreclosure or similar sale will be applied as
follows:
- FIRST, to the payment of court costs and fees in connection
with the foreclosure;
- SECOND, to real estate taxes;
- THIRD, in satisfaction of all principal, interest, prepayment
or acceleration penalties, if any, and any other sums due and
owing to the holder of the senior liens; and
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- LAST, in satisfaction of all principal, interest, prepayment
and acceleration penalties, if any, and any other sums due and
owing to the holder of the junior mortgage loan.
SUBORDINATE FINANCING
Some mortgage loans underlying a series of offered certificates may not
restrict the ability of the borrower to use the mortgaged property as security
for one or more additional loans, or the restrictions may be unenforceable.
Where a borrower encumbers a mortgaged property with one or more junior liens,
the senior lender is subjected to the following additional risks:
- the borrower may have difficulty servicing and repaying
multiple loans;
- if the subordinate financing permits recourse to the borrower,
as is frequently the case, and the senior loan does not, a
borrower may have more incentive to repay sums due on the
subordinate loan;
- acts of the senior lender that prejudice the junior lender or
impair the junior lender's security, such as the senior
lender's agreeing to an increase in the principal amount of or
the interest rate payable on the senior loan, may create a
superior equity in favor of the junior lender;
- if the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the
senior lender and can interfere with or delay the taking of
action by the senior lender; and
- the bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower
to pay a late charge or additional interest if payments are not timely made.
They may also contain provisions that prohibit prepayments for a specified
period and/or condition prepayments upon the borrower's payment of prepayment
premium, fee or charge. In some states, there are or may be specific limitations
upon the late charges that a lender may collect from a borrower for delinquent
payments. Some states also limit the amounts that a lender may collect from a
borrower as an additional charge if the loan is prepaid. In addition, the
enforceability of provisions that provide for prepayment premiums, fees and
charges upon an involuntary prepayment is unclear under the laws of many states.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980 provides that state usury limitations shall not apply to
various types of residential, including multifamily, first mortgage loans
originated by particular lenders after March 31, 1980. Title V authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a
law or constitutional provision that expressly rejects application of the
federal law. In addition, even where Title V is not
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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. Some
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and
rules promulgated thereunder, in order to protect individuals with disabilities,
owners of 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, the
altered portions are readily accessible to and usable by disabled individuals.
The "readily achievable" standard takes into account, among other factors, the
financial resources of the affected property owner, landlord or other applicable
person. In addition to imposing a possible financial burden on the borrower in
its capacity as owner or landlord, the ADA may also impose requirements on a
foreclosing lender who succeeds to the interest of the borrower as owner or
landlord. Furthermore, because the "readily achievable" standard may vary
depending on the financial condition of the owner or landlord, a foreclosing
lender that is financially more capable than the borrower of complying with the
requirements of the ADA may be subject to more stringent requirements than those
to which the borrower is subject.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended, a borrower who enters military service after the origination of the
borrower's mortgage loan, including a borrower who was in reserve status and is
called to active duty after origination of the mortgage loan, may not be charged
interest, including fees and charges, above an annual rate of 6% during the
period of the borrower's active duty status, unless a court orders otherwise
upon application of the lender. The Relief Act applies to individuals who are
members of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast
Guard and officers of the U.S. Public Health Service assigned to duty with the
military. Because the Relief Act applies to individuals who enter military
service, including reservists who are called to active duty, after origination
of the related mortgage loan, no information can be provided as to the number of
loans with individuals as borrowers that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of a master servicer or special
servicer to collect full amounts of interest on an affected mortgage loan. Any
shortfalls in interest collections resulting from the application of the Relief
Act would result in a reduction of the amounts payable to the holders of
certificates of the related series, and would not be covered by advances or,
unless otherwise specified in the related prospectus supplement, any form of
credit support provided in connection with the certificates. In addition, the
Relief Act imposes limitations that would impair the ability of a master
servicer or special servicer to foreclose on an affected mortgage loan during
the borrower's period of active duty status and, under some circumstances,
during an additional three month period after the active duty status ceases.
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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 statute can be seized by the government if the property
was used in, or purchased with the proceeds of, those crimes. Under procedures
contained in the comprehensive Crime Control Act of 1984, the government may
seize the property even before conviction. The government must publish notice of
the forfeiture proceeding and 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--
- its mortgage was executed and recorded before commission of
the crime upon which the forfeiture is based, or
- 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
GENERAL
This is a general discussion of the material federal income tax
consequences of owning the offered certificates. This discussion is directed to
certificateholders that hold the offered certificates as capital assets within
the meaning of Section 1221 of the Internal Revenue Code of 1986. It does not
discuss all federal income tax consequences that may be relevant to owners of
offered certificates, particularly as to investors subject to special treatment
under the Internal Revenue Code, including:
- banks,
- insurance companies, and
- foreign investors.
Further, this discussion and any legal opinions referred to in this
discussion are based on authorities that can change, or be differently
interpreted, with possible retroactive effect. No rulings have been or will be
sought from the IRS with respect to any of the federal income tax consequences
discussed below. Accordingly, the IRS may take contrary positions.
Investors and preparers of tax returns should be aware that under
applicable Treasury regulations a provider of advice on specific issues of law
is not considered an income tax return preparer unless the advice is--
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- given with respect to events that have occurred at the time
the advice is rendered, and
- is directly relevant to the determination of an entry on a tax
return.
Accordingly, even if this discussion addresses an issue regarding the
tax treatment of the owner of the offered certificates, investors should consult
their own tax advisors regarding that issue. Investors should do so not only as
to federal taxes, but also state and local taxes. See "State and Other Tax
Consequences."
The following discussion addresses securities of three general types:
- REMIC certificates, representing interests in a trust, or a
portion of the assets of that trust, as to which a specified
person or entity will make a real estate mortgage investment
conduit, or REMIC, election under Sections 860A through 860G
of the Internal Revenue Code;
- FASIT certificates, representing interests in a trust, or a
portion of the assets of that trust, as to which a specified
person or entity will make a financial asset securitization
investment trust, or FASIT, election within the meaning of
Section 860L(a) of the Internal Revenue Code; and
- grantor trust certificates, representing interests in a trust,
or a portion of the assets of that trust, as to which no REMIC
or FASIT election will be made.
We will indicate in the prospectus supplement for each series of
offered certificates whether the related trustee, another party to the related
Governing Document or an agent appointed by that trustee or other party will act
as tax administrator for the related trust. If the related tax administrator is
required to make a REMIC or FASIT election, we also will identify in the related
prospectus supplement all regular interests, residual interests and/or ownership
interests, as applicable, in the resulting REMIC or FASIT.
The following discussion is limited to certificates offered under this
prospectus. In addition, this discussion applies only to the extent that the
related trust holds only mortgage loans. If a trust holds assets other than
mortgage loans, such as mortgage-backed securities, we will disclose in the
related prospectus supplement the tax consequences associated with those other
assets being included. In addition, if agreements other than guaranteed
investment contracts are included in a trust to provide interest rate protection
for the related offered certificates, the anticipated material tax consequences
associated with those agreements also will be discussed in the related
prospectus supplement. See "Description of the Trust Assets--Arrangements
Providing Reinvestment, Interest Rate and Currency Related Protection."
The following discussion is based in part on the rules governing
original issue discount in Sections 1271-1273 and 1275 of the Internal Revenue
Code and in the Treasury regulations issued under those sections. It is also
based in part on the rules governing REMICs in Sections 860A-860G of
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the Internal Revenue Code and in the Treasury regulations issued under those
sections. The regulations relating to original issue discount do not adequately
address all issues relevant to, and in some instances provide that they are not
applicable to, securities such as the offered certificates.
REMICS
GENERAL. With respect to each series of offered certificates as to
which the related tax administrator will make a REMIC election, our counsel will
deliver its opinion generally to the effect that, assuming compliance with all
provisions of the related Governing Document, and subject to any other
assumptions set forth in the opinion:
- the related trust, or the relevant designated portion of the
trust, will qualify as a REMIC, and
- those offered certificates will represent--
1. regular interests in the REMIC, or
2. residual interests in the REMIC.
Any and all offered certificates representing interests in a REMIC will
be either--
- REMIC regular certificates, representing regular interests in
the REMIC, or
- REMIC residual certificates, representing residual interests
in the REMIC.
If an entity electing to be treated as a REMIC fails to comply with the
ongoing requirements of the Internal Revenue Code for REMIC status, it may lose
its REMIC status. If so, the entity may become taxable as a corporation.
Therefore, the related certificates may not be given the tax treatment
summarized below. Although the Internal Revenue Code authorizes the Treasury
Department to issue regulations providing relief in the event of an inadvertent
termination of REMIC status, the Treasury Department has not done so. Any relief
mentioned above, moreover, may be accompanied by sanctions. These sanctions
could include the imposition of a corporate tax on all or a portion of a trust's
income for the period in which the requirements for REMIC status are not
satisfied. The Governing Document with respect to each REMIC will include
provisions designed to maintain its status as a REMIC under the Internal Revenue
Code.
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CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES. Unless we state
otherwise in the related prospectus supplement, the offered certificates that
are REMIC certificates will be treated as--
- "real estate assets" within the meaning of Section
856(c)(5)(B) of the Internal Revenue Code in the hands of a
real estate investment trust, and
- "loans secured by an interest in real property" or other
assets described in Section 7701(a)(19)(C) of the Internal
Revenue Code in the hands of a thrift institution,
in the same proportion that the assets of the related REMIC are so treated.
However, to the extent that the REMIC assets constitute mortgage loans
on property not used for residential or other prescribed purposes, the related
offered certificates will not be treated as assets qualifying under Section
7701(a)(19)(C). If 95% or more of the assets of the REMIC qualify for any of the
foregoing characterizations at all times during a calendar year, the related
offered certificates will qualify for the corresponding status in their entirety
for that calendar year.
In addition, offered certificates that are REMIC regular certificates
will be:
- "qualified mortgages" within the meaning of Section 860G(a)(3)
of the Internal Revenue Code in the hands of another REMIC;
and
- "permitted assets" under Section 860L(c)(1)(G) for a FASIT.
Finally, interest, including original issue discount, on offered
certificates that are REMIC regular certificates, and income allocated to
offered certificates that are REMIC residual certificates, will be interest
described in Section 856(c)(3)(B) of the Internal Revenue Code if received by a
real estate investment trust, to the extent that these certificates are treated
as "real estate assets" within the meaning of Section 856(c)(5)(B) of the
Internal Revenue Code.
The related tax administrator will determine the percentage of the
REMIC's assets that constitute assets described in the above-referenced sections
of the Internal Revenue Code with respect to each calendar quarter based on the
average adjusted basis of each category of the assets held by the REMIC during
that calendar quarter. The related tax administrator will report those
determinations to certificateholders in the manner and at the times required by
applicable Treasury regulations.
The assets of the REMIC will include, in addition to mortgage loans--
- collections on mortgage loans held pending payment on the
related offered certificates, and
- any property acquired by foreclosure held pending sale, and
may include amounts in reserve accounts.
It is unclear whether property acquired by foreclosure held pending
sale, and amounts in reserve accounts, would be considered to be part of the
mortgage loans, or whether these assets otherwise would receive the same
treatment as the mortgage loans for purposes of the above-referenced sections of
the
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Internal Revenue Code. In addition, in some instances, the mortgage loans may
not be treated entirely as assets described in those sections of the Internal
Revenue Code. If so, we will describe in the related prospectus supplement those
mortgage loans that are characterized differently. The Treasury regulations do
provide, however, that cash received from collections on mortgage loans held
pending payment is considered part of the mortgage loans for purposes of Section
856(c)(5)(B) of the Internal Revenue Code, relating to real estate investment
trusts.
To the extent a REMIC certificate represents ownership of an interest
in a mortgage loan that is secured in part by the related borrower's interest in
a bank account, that mortgage loan is not secured solely by real estate.
Accordingly:
- a portion of that certificate may not represent ownership of
"loans secured by an interest in real property" or other
assets described in Section 7701(a)(19)(C) of the Internal
Revenue Code;
- a portion of that certificate may not represent ownership of
"real estate assets" under Section 856(c)(5)(B) of the
Internal Revenue Code; and
- the interest on that certificate may not constitute "interest
on obligations secured by mortgages on real property" within
the meaning of Section 856(c)(3)(B) of the Internal Revenue
Code.
TIERED REMIC STRUCTURES. For some series of REMIC certificates, the
related tax administrator may make two or more REMIC elections as to the related
trust for federal income tax purposes. As to each of these series of REMIC
certificates, our counsel will opine that each portion of the related trust as
to which a REMIC election is to be made will qualify as a REMIC. Each of these
series will be treated as one REMIC solely for purposes of determining:
- whether the related REMIC certificates will be "real estate
assets" within the meaning of Section 856(c)(5)(B) of the
Internal Revenue Code,
- whether the related REMIC certificates will be "loans secured
by an interest in real property" under Section 7701(a)(19)(C)
of the Internal Revenue Code, and
- whether the interest/income on the related REMIC certificates
is interest described in Section 856(c)(3)(B) of the Internal
Revenue Code.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES.
GENERAL. Except as otherwise stated in this discussion, the Internal
Revenue Code treats REMIC regular certificates as debt instruments issued by the
REMIC and not as ownership interests in the REMIC or its assets. Holders of
REMIC regular certificates that otherwise report income under the cash method of
accounting must nevertheless report income with respect to REMIC regular
certificates under the accrual method.
ORIGINAL ISSUE DISCOUNT. Some REMIC regular certificates may be issued
with original issue discount within the meaning of Section 1273(a) of the
Internal Revenue Code. Any holders of REMIC regular certificates issued with
original issue discount generally will have to
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include original issue discount in income as it accrues, in accordance with a
constant yield method, prior to the receipt of the cash attributable to that
income. The IRS has issued regulations under Section 1271 to 1275 of the
Internal Revenue Code generally addressing the treatment of debt instruments
issued with original issue discount. Section 1272(a)(6) of the Internal Revenue
Code provides special rules applicable to the accrual of original issue discount
on, among other things, REMIC regular certificates. The Treasury Department has
not issued regulations under that section. You should be aware, however, that
Section 1272(a)(6) and the regulations under Sections 1271 to 1275 of the
Internal Revenue Code do not adequately address all issues relevant to, or are
not applicable to, prepayable securities such as the offered certificates. We
recommend that you consult with your own tax advisor concerning the tax
treatment of your offered certificates.
The Internal Revenue Code requires, in computing the accrual of
original issue discount on REMIC regular certificates, that a reasonable
assumption be used concerning the rate at which borrowers will prepay the
mortgage loans held by the related REMIC. Further, adjustments must be made in
the accrual of that original issue discount to reflect differences between the
prepayment rate actually experienced and the assumed prepayment rate. The
prepayment assumption is to be determined in a manner prescribed in Treasury
regulations that the Treasury Department has not yet issued. The Committee
Report indicates that the regulations should provide that the prepayment
assumption used with respect to a REMIC regular certificate is determined once,
at initial issuance, and must be the same as that used in pricing. The
prepayment assumption used in reporting original issue discount for each series
of REMIC regular certificates will be consistent with this standard and will be
disclosed in the related prospectus supplement. However, neither we nor any
other person will make any representation that the mortgage loans underlying any
series of REMIC regular certificates will in fact prepay at a rate conforming to
the prepayment assumption or at any other rate or that the IRS will not
challenge on audit the prepayment assumption used.
The original issue discount, if any, on a REMIC regular certificate
will be the excess of its stated redemption price at maturity over its issue
price.
The issue price of a particular class of REMIC regular certificates
will be the first cash price at which a substantial amount of those certificates
are sold, excluding sales to bond houses, brokers and underwriters. If less than
a substantial amount of a particular class of REMIC regular certificates is sold
for cash on or prior to the related date of initial issuance of those
certificates, the issue price for that class will be the fair market value of
that class on the date of initial issuance.
Under the Treasury regulations, the stated redemption price of a REMIC
regular certificate is equal to the total of all payments to be made on that
certificate other than qualified stated interest. Qualified stated interest is
interest that is unconditionally payable at least annually, during the entire
term of the instrument, at:
- a single fixed rate,
- a "qualified floating rate,"
- an "objective rate,"
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- a combination of a single fixed rate and one or more
"qualified floating rates,"
- a combination of a single fixed rate and one "qualified
inverse floating rate," or
- a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest
payments on the REMIC regular certificate.
In the case of REMIC regular certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion of that discount will vary according to the
characteristics of those certificates. If the original issue discount rules
apply to those certificates, we will describe in the related prospectus
supplement the manner in which those rules will be applied with respect to those
certificates in preparing information returns to the certificateholders and the
IRS.
Some classes of REMIC regular certificates may provide that the first
interest payment with respect to those certificates be made more than one month
after the date of initial issuance, a period that is longer than the subsequent
monthly intervals between interest payments. Assuming the accrual period for
original issue discount is the monthly period that ends on each payment date,
then, as a result of this long first accrual period, some or all interest
payments may be required to be included in the stated redemption price of the
REMIC regular certificate and accounted for as original issue discount. Because
interest on REMIC regular certificates must in any event be accounted for under
an accrual method, applying this analysis would result in only a slight
difference in the timing of the inclusion in income of the yield on the REMIC
regular certificates.
In addition, if the accrued interest to be paid on the first payment
date is computed with respect to a period that begins prior to the date of
initial issuance, a portion of the purchase price paid for a REMIC regular
certificate will reflect that accrued interest. In those cases, information
returns provided to the certificateholders and the IRS will be based on the
position that the portion of the purchase price paid for the interest accrued
prior to the date of initial issuance is treated as part of the overall cost of
the REMIC regular certificate. Therefore, the portion of the interest paid on
the first payment date in excess of interest accrued from the date of initial
issuance to the first payment date is included in the stated redemption price of
the REMIC regular certificate. However, the Treasury regulations state that all
or some portion of this accrued interest may be treated as a separate asset, the
cost of which is recovered entirely out of interest paid on the first payment
date. It is unclear how an election to do so would be made under these
regulations and whether this election could be made unilaterally by a
certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC regular certificate will be considered to be
DE MINIMIS if it is less than 0.25% of the stated redemption price of the
certificate multiplied by its weighted average maturity. For this purpose, the
weighted average maturity of a REMIC regular certificate is computed as the sum
of the amounts determined, as to each payment included in the stated redemption
price of the certificate, by multiplying:
- the number of complete years, rounding down for partial years,
from the date of initial issuance, until that payment is
expected to be made, presumably taking into account the
prepayment assumption, by
- a fraction--
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1. the numerator of which is the amount of the payment,
and
2. the denominator of which is the stated redemption
price at maturity of the certificate.
Under the Treasury regulations, original issue discount of only a DE
MINIMIS amount, other than DE MINIMIS original issue discount attributable to a
so-called "teaser" interest rate or an initial interest holiday, will be
included in income as each payment of stated principal is made, based on the
product of:
- the total amount of the DE MINIMIS original issue discount,
and
- a fraction--
1. the numerator of which is the amount of the principal
payment, and
2. the denominator of which is the outstanding stated
principal amount of the subject REMIC regular
certificate.
The Treasury regulations also would permit you to elect to accrue DE
MINIMIS original issue discount into income currently based on a constant yield
method. See "--REMICs--Taxation of Owners of REMIC Regular Certificates--Market
Discount" below for a description of that election under the applicable Treasury
regulations.
If original issue discount on a REMIC regular certificate is in excess
of a DE MINIMIS amount, the holder of the certificate must include in ordinary
gross income the sum of the daily portions of original issue discount for each
day during its taxable year on which it held the certificate, including the
purchase date but excluding the disposition date. In the case of an original
holder of a REMIC regular certificate, the daily portions of original issue
discount will be determined as described below in this "--Original Issue
Discount" subsection.
As to each accrual period, the related tax administrator will calculate
the original issue discount that accrued during that accrual period. For these
purposes, an accrual period is, unless we otherwise state in the related
prospectus supplement, the period that begins on a date that corresponds to a
payment date, or in the case of the first accrual period, begins on the date of
initial issuance, and ends on the day preceding the immediately following
payment date. The portion of original issue discount that accrues in any accrual
period will equal the excess, if any, of:
- the sum of:
1. the present value, as of the end of the accrual
period, of all of the payments remaining to be made
on the subject REMIC regular certificate, if any, in
future periods, presumably taking into account the
prepayment assumption, and
2. the payments made on that certificate during the
accrual period of amounts included in the stated
redemption price, over
- the adjusted issue price of the subject REMIC regular
certificate at the beginning of the accrual period.
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The adjusted issue price of a REMIC regular certificate is:
- the issue price of the certificate, increased by
- the total amount of original issue discount previously accrued
on the certificate, reduced by
- the amount of all prior payments of amounts included in its
stated redemption price.
The present value of the remaining payments referred to in item 1. of the second
preceding sentence will be calculated:
- assuming that payments on the REMIC regular certificate will
be received in future periods based on the related mortgage
loans being prepaid at a rate equal to the prepayment
assumption;
- using a discount rate equal to the original yield to maturity
of the certificate, based on its issue price and the
assumption that the related mortgage loans will be prepaid at
a rate equal to the prepayment assumption; and
- taking into account events, including actual prepayments, that
have occurred before the close of the accrual period.
The original issue discount accruing during any accrual period,
computed as described above, will be allocated ratably to each day during the
accrual period to determine the daily portion of original issue discount for
that day.
A subsequent purchaser of a REMIC regular certificate that purchases
the certificate at a cost, excluding any portion of that cost attributable to
accrued qualified stated interest, that is less than its remaining stated
redemption price, will also be required to include in gross income the daily
portions of any original issue discount with respect to the certificate.
However, the daily portion will be reduced, if the cost is in excess of its
adjusted issue price, in proportion to the ratio that the excess bears to the
total original issue discount remaining to be accrued on the certificate. The
adjusted issue price of a REMIC regular certificate, as of any date of
determination, equals the sum of:
- the adjusted issue price or, in the case of the first accrual
period, the issue price, of the certificate at the beginning
of the accrual period which includes that date of
determination, and
- the daily portions of original issue discount for all days
during that accrual period prior to that date of
determination.
If the foregoing method for computing original issue discount results
in a negative amount of original issue discount as to any accrual period with
respect to a REMIC regular certificate held by you, the amount of original issue
discount accrued for that accrual period will be zero. You may not deduct the
negative amount currently. Instead, you will only be permitted to offset it
against future positive original issue discount, if any, attributable to the
certificate. Although not free from doubt, it is possible
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that you may be permitted to recognize a loss to the extent your basis in the
certificate exceeds the maximum amount of payments that you could ever receive
with respect to the certificate. However, the loss may be a capital loss, which
is limited in its deductibility. The foregoing considerations are particularly
relevant to certificates that have no, or a disproportionately small, amount of
principal because they can have negative yields if the mortgage loans held by
the related REMIC prepay more quickly than anticipated. See "Risk Factors--The
Investment Performance of Your Offered Certificate Will Depend Upon Payments,
Defaults and Losses on the Underlying Mortgage Loans."
The Treasury regulations in some circumstances permit the holder of a
debt instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, it is possible that you may be able
to select a method for recognizing original issue discount that differs from
that used by the trust in preparing reports to you and the IRS. Prospective
purchasers of the REMIC regular certificates should consult their tax advisors
concerning the tax treatment of these certificates in this regard.
MARKET DISCOUNT. You will be considered to have purchased a REMIC
regular certificate at a market discount if--
- in the case of a certificate issued without original issue
discount, you purchased the certificate at a price less than
its remaining stated principal amount, or
- in the case of a certificate issued with original issue
discount, you purchased the certificate at a price less than
its adjusted issue price.
If you purchase a REMIC regular certificate with more than a DE MINIMIS
amount of market discount, you will recognize gain upon receipt of each payment
representing stated redemption price. Under Section 1276 of the Internal Revenue
Code, you generally will be required to allocate the portion of each payment
representing some or all of the stated redemption price first to accrued market
discount not previously included in income. You must recognize ordinary income
to that extent. You may elect to include market discount in income currently as
it accrues rather than including it on a deferred basis in accordance with the
foregoing. If made, this election will apply to all market discount bonds
acquired by you on or after the first day of the first taxable year to which
this election applies.
The Treasury regulations also permit you to elect to accrue all
interest and discount, including DE MINIMIS market or original issue discount,
in income as interest, and to amortize premium, based on a constant yield
method. Your making this election with respect to a REMIC regular certificate
with market discount would be deemed to be an election to include currently
market discount in income with respect to all other debt instruments with market
discount that you acquire during the taxable year of the election or thereafter,
and possibly previously acquired instruments. Similarly, your making this
election as to a certificate acquired at a premium would be deemed to be an
election to amortize bond premium, with respect to all debt instruments having
amortizable bond premium that you own or acquire. See "--REMICs --Taxation of
Owners of REMIC Regular Certificates--Premium" below.
Each of the elections described above to accrue interest and discount,
and to amortize premium, with respect to a certificate on a constant yield
method or as interest would be irrevocable except with the approval of the IRS.
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However, market discount with respect to a REMIC regular certificate
will be considered to be DE MINIMIS for purposes of Section 1276 of the Internal
Revenue Code if the market discount is less than 0.25% of the remaining stated
redemption price of the certificate multiplied by the number of complete years
to maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the Treasury regulations refer to the weighted average maturity of
obligations. It is likely that the same rule will be applied with respect to
market discount, presumably taking into account the prepayment assumption. If
market discount is treated as DE MINIMIS under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a DE MINIMIS amount. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above. This treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Internal Revenue Code specifically authorizes
the Treasury Department to issue regulations providing for the method for
accruing market discount on debt instruments, the principal of which is payable
in more than one installment. Until regulations are issued by the Treasury
Department, the relevant rules described in the Committee Report apply. The
Committee Report indicates that in each accrual period, you may accrue market
discount on a REMIC regular certificate held by you, at your option:
- on the basis of a constant yield method,
- in the case of a certificate issued without original issue
discount, in an amount that bears the same ratio to the total
remaining market discount as the stated interest paid in the
accrual period bears to the total amount of stated interest
remaining to be paid on the certificate as of the beginning of
the accrual period, or
- in the case of a certificate issued with original issue
discount, in an amount that bears the same ratio to the total
remaining market discount as the original issue discount
accrued in the accrual period bears to the total amount of
original issue discount remaining on the certificate at the
beginning of the accrual period.
The prepayment assumption used in calculating the accrual of original
issue discount is also used in calculating the accrual of market discount.
To the extent that REMIC regular certificates provide for monthly or
other periodic payments throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which the discount would accrue if it were
original issue discount. Moreover, in any event a holder of a REMIC regular
certificate generally will be required to treat a portion of any gain on the
sale or exchange of the certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, Section 1277 of the Internal Revenue Code may require you to
defer a portion of your interest deductions for the taxable year attributable to
any indebtedness incurred or continued to purchase or carry a REMIC regular
certificate purchased with market discount. For these purposes, the DE MINIMIS
rule referred to above applies. Any deferred interest expense would not exceed
the market
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discount that accrues during the related taxable year and is, in general,
allowed as a deduction not later than the year in which the related market
discount is includible in income. If you have elected, however, to include
market discount in income currently as it accrues, the interest deferral rule
described above would not apply.
PREMIUM. A REMIC regular certificate purchased at a cost, excluding any
portion of the cost attributable to accrued qualified stated interest, that is
greater than its remaining stated redemption price will be considered to be
purchased at a premium. You may elect under Section 171 of the Internal Revenue
Code to amortize the premium under the constant yield method over the life of
the certificate. If you elect to amortize bond premium, bond premium would be
amortized on a constant yield method and would be applied as an offset against
qualified stated interest. If made, this election will apply to all debt
instruments having amortizable bond premium that you own or subsequently
acquire. The IRS has issued regulations on the amortization of bond premium, but
they specifically do not apply to holders of REMIC regular certificates.
The Treasury regulations also permit you to elect to include all
interest, discount and premium in income based on a constant yield method,
further treating you as having made the election to amortize premium generally.
See "--Taxation of Owners of REMIC Regular Certificates--Market Discount" above.
The Committee Report states that the same rules that apply to accrual of market
discount and require the use of a prepayment assumption in accruing market
discount with respect to REMIC regular certificates without regard to whether
those certificates have original issue discount, will also apply in amortizing
bond premium under Section 171 of the Internal Revenue Code.
Whether you will be treated as holding a REMIC regular certificate with
amortizable bond premium will depend on--
- the purchase price paid for your offered certificate, and
- the payments remaining to be made on your offered certificate
at the time of its acquisition by you.
If you acquire an interest in any class of REMIC regular certificates
issued at a premium, you should consider consulting your own tax advisor
regarding the possibility of making an election to amortize the premium.
REALIZED LOSSES. Under Section 166 of the Internal Revenue Code, if you
are either a corporate holder of a REMIC regular certificate and or a
noncorporate holder of a REMIC regular certificate that acquires the certificate
in connection with a trade or business, you should be allowed to deduct, as
ordinary losses, any losses sustained during a taxable year in which your
offered certificate becomes wholly or partially worthless as the result of one
or more realized losses on the related mortgage loans. However, if you are a
noncorporate holder that does not acquire a REMIC regular certificate in
connection with a trade or business, it appears that--
- you will not be entitled to deduct a loss under Section 166 of
the Internal Revenue Code until your offered certificate
becomes wholly worthless, which is when its principal balance
has been reduced to zero, and
- the loss will be characterized as a short-term capital loss.
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You will also have to accrue interest and original issue discount with
respect to your REMIC regular certificate, without giving effect to any
reductions in payments attributable to defaults or delinquencies on the related
mortgage loans, until it can be established that those payment reductions are
not recoverable. As a result, your taxable income in a period could exceed your
economic income in that period. If any of those amounts previously included in
taxable income are not ultimately received due to a loss on the related mortgage
loans, you should be able to recognize a loss or reduction in income. However,
the law is unclear with respect to the timing and character of this loss or
reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES.
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, the Internal Revenue Code does not subject a REMIC to entity-level
taxation, except with regard to prohibited transactions and the other
transactions described under "--REMICs--Prohibited Transactions Tax and Other
Taxes" below. Rather, a holder of REMIC residual certificates must generally
take in income the taxable income or net loss of the related REMIC.
Accordingly, the Internal Revenue Code treats the REMIC residual certificates
much differently than it would if they were direct ownership interests in the
related mortgage loans or as debt instruments issued by the related REMIC.
Holders of REMIC residual certificates generally will be required to
report their daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the related REMIC for each day during
a calendar quarter that they own those certificates. For this purpose, the
taxable income or net loss of the REMIC will be allocated to each day in the
calendar quarter ratably using a "30 days per month/90 days per quarter/360 days
per year" convention unless we otherwise disclose in the related prospectus
supplement. These daily amounts then will be allocated among the holders of the
REMIC residual certificates in proportion to their respective ownership
interests on that day. Any amount included in the certificateholders' gross
income or allowed as a loss to them by virtue of this paragraph will be treated
as ordinary income or loss. The taxable income of the REMIC will be determined
under the rules described below in "--REMICs--Taxation of Owners of REMIC
Residual Certificates--Taxable Income of the REMIC." Holders of REMIC residual
certificates must report the taxable income of the related REMIC without regard
to the timing or amount of cash payments by the REMIC until the REMIC's
termination. Income derived from the REMIC residual certificates will be
"portfolio income" for the purposes of the limitations under Section 469 of the
Internal Revenue Code on the deductibility of "passive losses."
A holder of a REMIC residual certificate that purchased the certificate
from a prior holder also will be required to report on its federal income tax
return amounts representing its daily share of the taxable income, or net loss,
of the related REMIC for each day that it holds the REMIC residual certificate.
These daily amounts generally will equal the amounts of taxable income or net
loss determined as described above. The Committee Report indicates that
modifications of the general rules may be made, by regulations, legislation or
otherwise to reduce, or increase, the income of a holder of a REMIC residual
certificate. These modifications would occur when a holder purchases the REMIC
residual certificate from a prior holder at a price other than the adjusted
basis that the REMIC residual certificate would have had in the hands of an
original holder of that certificate. The Treasury regulations, however, do not
provide for these modifications.
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Any payments that you receive from the seller of a REMIC residual
certificate in connection with the acquisition of that certificate will be
income to you. Although it is possible that these payments would be includible
in income immediately upon receipt, the IRS might assert that you should include
these payments in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of these payments, we recommend that you consult your tax advisor
concerning the treatment of these payments for income tax purposes.
Tax liability with respect to the amount of income that holders of
REMIC residual certificates will be required to report, will often exceed the
amount of cash payments received from the related REMIC for the corresponding
period. Consequently, you should have--
- other sources of funds sufficient to pay any federal income
taxes due as a result of your ownership of REMIC residual
certificates, or
- unrelated deductions against which income may be offset.
See, however, the rules discussed below relating to:
- excess inclusions,
- residual interests without significant value, and
- noneconomic residual interests.
The fact that the tax liability associated with this income allocated to you
may exceed the cash payments received by you for the corresponding period may
significantly and adversely affect their after-tax rate of return. This
disparity between income and payments may not be offset by corresponding
losses or reductions of income attributable to your REMIC residual
certificates until subsequent tax years. Even then, the extra income may not
be completely offset due to changes in the Internal Revenue Code, tax rates
or character of the income or loss. Therefore, REMIC residual certificates
will ordinarily have a negative value at the time of issuance. See "Risk
Factors--"Residual Interests" in a "Real Estate Mortgage Investment Conduit"
Have Adverse Tax Consequences."
TAXABLE INCOME OF THE REMIC. The taxable income of a REMIC will equal:
- the income from the mortgage loans and other assets of the
REMIC; plus
- any cancellation of indebtedness income due to the allocation
of realized losses to those REMIC certificates constituting
regular interests in the REMIC; less the following items--
1. the deductions allowed to the REMIC for interest,
including original issue discount but reduced by any
premium on issuance, on any class of REMIC
certificates constituting regular interests in the
REMIC, whether offered or not,
2. amortization of any premium on the mortgage loans
held by the REMIC,
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3. bad debt losses with respect to the mortgage loans
held by the REMIC, and
4. except as described below in this "--Taxable Income
of the REMIC" subsection, servicing, administrative
and other expenses.
For purposes of determining its taxable income, a REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC certificates, or in the case of REMIC certificates not sold initially,
their fair market values. The aggregate basis will be allocated among the
mortgage loans and the other assets of the REMIC in proportion to their
respective fair market values. The issue price of any REMIC certificates offered
hereby will be determined in the manner described above under
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount." The issue price of a REMIC certificate received in exchange for an
interest in mortgage loans or other property will equal the fair market value of
the interests in the mortgage loans or other property. Accordingly, if one or
more classes of REMIC certificates are retained initially rather than sold, the
related tax administrator may be required to estimate the fair market value of
these interests in order to determine the basis of the REMIC in the mortgage
loans and other property held by the REMIC.
Subject to possible application of the DE MINIMIS rules, the method of
accrual by a REMIC of original issue discount income and market discount income
with respect to mortgage loans that it holds will be equivalent to the method
for accruing original issue discount income for holders of REMIC regular
certificates. That method is a constant yield method taking into account the
prepayment assumption. However, a REMIC that acquires loans at a market discount
must include that market discount in income currently, as it accrues, on a
constant yield basis. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing the discount income
that is analogous to that required to be used by a REMIC as to mortgage loans
with market discount that it holds.
A REMIC will acquire a mortgage loan with discount, or premium, to the
extent that the REMIC's basis, determined as described in the preceding
paragraph, is different from its stated redemption price. Discount will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to that income, under a method similar to the method
described above for accruing original issue discount on the REMIC regular
certificates. A REMIC probably will elect under Section 171 of the Internal
Revenue Code to amortize any premium on the mortgage loans that it holds.
Premium on any mortgage loan to which this election applies may be amortized
under a constant yield method, presumably taking into account the prepayment
assumption.
A REMIC will be allowed deductions for interest, including original
issue discount, on all of the certificates that constitute regular interests in
the REMIC, whether or not offered hereby, as if those certificates were
indebtedness of the REMIC. Original issue discount will be considered to accrue
for this purpose as described above under "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount." However, the DE MINIMIs rule
described in that section will not apply in determining deductions.
If a class of REMIC regular certificates is issued at a price in excess
of the stated redemption price of that class, the net amount of interest
deductions that are allowed to the REMIC in each taxable year with respect to
those certificates will be reduced by an amount equal to the portion of that
excess that is considered to be amortized in that year. It appears that this
excess should be amortized under a
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constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount."
As a general rule, the taxable income of a REMIC will be determined as
if the REMIC were an individual having the calendar year as its taxable year and
using the accrual method of accounting. However, no item of income, gain, loss
or deduction allocable to a prohibited transaction will be taken into account.
See "--REMICs--Prohibited Transactions Tax and Other Taxes" below. Further, the
limitation on miscellaneous itemized deductions imposed on individuals by
Section 67 of the Internal Revenue Code will not be applied at the REMIC level
so that the REMIC will be allowed full deductions for servicing, administrative
and other noninterest expenses in determining its taxable income. All those
expenses will be allocated as a separate item to the holders of the related
REMIC certificates, subject to the limitation of Section 67 of the Internal
Revenue Code. See "--REMICs--Taxation of Owners of REMIC Residual
Certificates--Possible Pass-Through of Miscellaneous Itemized Deductions" below.
If the deductions allowed to the REMIC exceed its gross income for a calendar
quarter, the excess will be the net loss for the REMIC for that calendar
quarter.
BASIS RULES, NET LOSSES AND PAYMENTS. The adjusted basis of a REMIC
residual certificate will be equal to:
- the amount paid for that REMIC residual certificate,
- increased by, amounts included in the income of the
holder of that REMIC residual certificate, and
- decreased, but not below zero, by payments made, and
by net losses allocated, to the holder of that REMIC
residual certificate.
A holder of a REMIC residual certificate is not allowed to take into
account any net loss for any calendar quarter to the extent that the net loss
exceeds the adjusted basis to that holder as of the close of that calendar
quarter, determined without regard to that net loss. Any loss that is not
currently deductible by reason of this limitation may be carried forward
indefinitely to future calendar quarters and, subject to the same limitation,
may be used only to offset income from the REMIC residual certificate.
Any payment on a REMIC residual certificate will be treated as a
nontaxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC residual certificate. To the extent a payment on a
REMIC residual certificate exceeds the holder's adjusted basis, it will be
treated as gain from the sale of that REMIC residual certificate.
A holder's basis in a REMIC residual certificate will initially equal
the amount paid for the certificate and will be increased by that holder's
allocable share of taxable income of the related REMIC. However, these increases
in basis may not occur until the end of the calendar quarter, or perhaps the end
of the calendar year, with respect to which the related REMIC's taxable income
is allocated to that holder. To the extent the initial basis of the holder of a
REMIC residual certificate is less than the payments to that holder, and
increases in the initial basis either occur after these payments or, together
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with the initial basis, are less than the amount of these payments, gain will be
recognized to that holder on these payments. This gain will be treated as gain
from the sale of its REMIC residual certificate.
The effect of these rules is that a holder of a REMIC residual
certificate may not amortize its basis in a REMIC residual certificate, but may
only recover its basis:
- through payments,
- through the deduction of any net losses of the REMIC, or
- upon the sale of its REMIC residual certificate. See
"--REMICs--Sales of REMIC Certificates" below.
For a discussion of possible modifications of these rules that may
require adjustments to income of a holder of a REMIC residual certificate other
than an original holder see "--REMICs--Taxation of Owners of REMIC Residual
Certificates--General" above. These adjustments could require a holder of a
REMIC residual certificate to account for any difference between the cost of the
certificate to the holder and the adjusted basis of the certificate would have
been in the hands of an original holder.
EXCESS INCLUSIONS. Any excess inclusions with respect to a REMIC
residual certificate will be subject to federal income tax in all events. In
general, the excess inclusions with respect to a REMIC residual certificate for
any calendar quarter will be the excess, if any, of:
- the daily portions of REMIC taxable income allocable to that
certificate, over
- the sum of the daily accruals for each day during the quarter
that the certificate was held by that holder.
The daily accruals of a holder of a REMIC residual certificate will be
determined by allocating to each day during a calendar quarter its ratable
portion of a numerical calculation. That calculation is the product of the
adjusted issue price of the REMIC residual certificate at the beginning of the
calendar quarter and 120% of the long-term Federal rate in effect on the date of
initial issuance. For this purpose, the adjusted issue price of a REMIC residual
certificate as of the beginning of any calendar quarter will be equal to:
- the issue price of the certificate, increased by
- the sum of the daily accruals for all prior quarters, and
decreased, but not below zero, by
- any payments made with respect to the certificate before the
beginning of that quarter.
The issue price of a REMIC residual certificate is the initial offering
price to the public at which a substantial amount of the REMIC residual
certificates were sold, but excluding sales to bond houses, brokers and
underwriters or, if no sales have been made, their initial value. The long-term
Federal
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rate is an average of current yields on Treasury securities with a remaining
term of greater than nine years, computed and published monthly by the IRS.
Although it has not done so, the Treasury Department 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 interest
evidenced by that certificate is considered not to have significant value.
For holders of REMIC residual certificates, excess inclusions:
- will not be permitted to be offset by deductions, losses or
loss carryovers from other activities,
- will be treated as unrelated business taxable income to an
otherwise tax-exempt organization, and
- will not be eligible for any rate reduction or exemption under
any applicable tax treaty with respect to the 30% United
States withholding tax imposed on payments to holders of REMIC
residual certificates that are foreign investors. See,
however, "--REMICs--Foreign Investors in REMIC Certificates"
below.
Furthermore, for purposes of the alternative minimum tax:
- excess inclusions will not be permitted to be offset by the
alternative tax net operating loss deduction, and
- alternative minimum taxable income may not be less than the
taxpayer's excess inclusions.
This last rule has the effect of preventing non-refundable tax credits
from reducing the taxpayer's income tax to an amount lower than the alternative
minimum tax on excess inclusions.
In the case of any REMIC residual certificates held by a real estate
investment trust, or REIT, the total excess inclusions with respect to these
REMIC residual certificates will be allocated among the shareholders of the REIT
in proportion to the dividends received by the shareholders from the REIT. Any
amount so allocated will be treated as an excess inclusion with respect to a
REMIC residual certificate as if held directly by the shareholder. The total
excess inclusions referred to in the previous sentence will be reduced, but not
below zero, by any REIT taxable income, within the meaning of Section 857(b)(2)
of the Internal Revenue Code, other than any net capital gain. Treasury
regulations yet to be issued could apply a similar rule to:
- regulated investment companies,
- common trusts, and
- some cooperatives.
The Treasury regulations, however, currently do not address this
subject.
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NONECONOMIC REMIC RESIDUAL CERTIFICATES. Under the Treasury
regulations, transfers of noneconomic REMIC residual certificates will be
disregarded for all federal income tax purposes if "a significant purpose of the
transfer was to enable the transferor to impede the assessment or collection of
tax." If a transfer is disregarded, the purported transferor will continue to
remain liable for any taxes due with respect to the income on the noneconomic
REMIC residual certificate. The Treasury regulations provide that a REMIC
residual certificate is noneconomic unless, based on the prepayment assumption
and on any required or permitted clean up calls, or required liquidation
provided for in the related Governing Document:
- the present value of the expected future payments on the REMIC
residual certificate equals at least the present value of the
expected tax on the anticipated excess inclusions, and
- the transferor reasonably expects that the transferee will
receive payments with respect to the REMIC residual
certificate at or after the time the taxes accrue on the
anticipated excess inclusions in an amount sufficient to
satisfy the accrued taxes.
The present value calculation referred to above is calculated using the
applicable Federal rate for obligations whose term ends on the close of the last
quarter in which excess inclusions are expected to accrue with respect to the
REMIC residual certificate. This rate is computed and published monthly by the
IRS.
Accordingly, all transfers of REMIC residual certificates that may
constitute noneconomic residual interests will be subject to restrictions under
the terms of the related Governing Document that are intended to reduce the
possibility of any transfer being disregarded. These restrictions will require
an affidavit:
- from each party to the transfer, stating that no purpose of
the transfer is to impede the assessment or collection of tax,
- from the prospective transferee, providing representations as
to its financial condition, and
- from the prospective transferor, stating that it has made a
reasonable investigation to determine the transferee's
historic payment of its debts and ability to continue to pay
its debts as they come due in the future.
The Treasury recently issued proposed regulations that would revise
this safe harbor. The proposed regulations would make the safe harbor
unavailable unless the present value of the anticipated tax liabilities
associated with holding the residual interest did not exceed the sum of:
- the present value of any consideration given to the transferee
to acquire the interest,
- the present value of the expected future distributions on the
interest, and
- the present value of the anticipated tax savings associated
with the holding of the interest as the REMIC generates
losses.
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Present values would be computed using a discount rate equal to an applicable
Federal rate, except that if a transferee could demonstrate that it borrowed
regularly in the course of its trade or business substantial funds at a lower
rate from unrelated third parties, that lower rate could be used as the discount
rate.
It is not clear when those regulations would be effective. Although the
text of the proposed regulations states that they would be effective on February
4, 2000, the preamble to the proposed regulations says that these regulations
will apply to transfers of REMIC residual interests made after the date the
final regulations are published in the Federal Register. The Treasury Department
is anticipated to issue clarification with regard to these conflicting
statements regarding the effective date of the proposed regulations shortly.
Prior to purchasing a REMIC residual certificate, prospective
purchasers should consider the possibility that a purported transfer of a REMIC
residual certificate to another party at some future date may be disregarded in
accordance with the above-described rules. This would result in the retention of
tax liability by the transferor with respect to that purported transfer.
We will disclose in the related prospectus supplement whether the
offered REMIC residual certificates may be considered noneconomic residual
interests under the Treasury regulations. However, we will base any disclosure
that a REMIC residual certificate will not be considered noneconomic upon
various assumptions. Further, we will make no representation that a REMIC
residual certificate will not be considered noneconomic for purposes of the
above-described rules.
See "--REMICs--Foreign Investors in REMIC Certificates" below for
additional restrictions applicable to transfers of REMIC residual certificates
to foreign persons.
MARK-TO-MARKET RULES. Regulations under Section 475 of the Internal
Revenue Code require that a securities dealer mark to market securities held for
sale to customers. This mark-to-market requirement applies to all securities
owned by a dealer, except to the extent that the dealer has specifically
identified a security as held for investment. These regulations provide that for
purposes of this mark-to-market requirement, a REMIC residual certificate is not
treated as a security for purposes of Section 475 of the Internal Revenue Code.
Thus, a REMIC residual certificate is not subject to the mark-to-market rules.
We recommend that prospective purchasers of a REMIC residual certificate consult
their tax advisors regarding these regulations.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO INVESTORS THAT ARE
FOREIGN PERSONS. Unless we otherwise state in the related prospectus
supplement, transfers of REMIC residual certificates to investors that are
foreign persons under the Internal Revenue Code will be prohibited under the
related Governing Documents.
If transfers of REMIC residual certificates to investors that are
foreign persons are permitted under the related Governing Documents, and such
a transfer takes place, then it is possible that the transfer will be
disregarded for all federal tax purposes. The applicable Treasury regulations
provide that a transfer of a REMIC residual certificate that has "tax
avoidance potential" to a non-U.S. Person will be disregarded for all federal
tax purposes, unless the transferee's income is effectively connected with
the conduct of a trade or business within the United States. A REMIC residual
certificate is deemed to have tax avoidance potential unless, at the time of
the transfer--
- the future value of expected distributions equals at least 30%
of the anticipated excess inclusions after the transfer, and
- the transferor reasonably expects that the transferee will
receive sufficient distributions from the REMIC at or after
the time at which the excess inclusions accrue and prior to
the end of the next succeeding taxable year for the
accumulated withholding tax liability to be paid.
If the non-U.S. Person transfers the REMIC residual certificate back
to a U.S. Person, the transfer will be disregarded and the foreign transferor
will continue to be treated as the owner unless arrangements are made so that
the transfer does not have the effect of allowing the transferor to avoid tax
on accrued excess inclusions.
PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS. Fees and expenses of
a REMIC generally will be allocated to the holders of the related REMIC residual
certificates. The applicable Treasury regulations indicate, however, that in the
case of a REMIC that is similar to a single class grantor trust, all or a
portion of these fees and expenses should be allocated to the holders of the
related REMIC
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regular certificates. Unless we state otherwise in the related prospectus
supplement, however, these fees and expenses will be allocated to holders of the
related REMIC residual certificates in their entirety and not to the holders of
the related REMIC regular certificates.
If the holder of a REMIC certificate receives an allocation of fees and
expenses in accordance with the preceding discussion, and if that holder is:
- an individual,
- an estate or trust, or
- a Pass-Through Entity beneficially owned by one or more
individuals, estates or trusts,
then--
- an amount equal to this individual's, estate's or trust's
share of these fees and expenses will be added to the gross
income of this holder, and
- the individual's, estate's or trust's share of these fees and
expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of the
Internal Revenue Code, which permits the deduction of these
fees and expenses only to the extent they exceed, in total, 2%
of a taxpayer's adjusted gross income.
In addition, Section 68 of the Internal Revenue Code provides that the
amount of itemized deductions otherwise allowable for an individual whose
adjusted gross income exceeds a specified amount will be reduced by the lesser
of:
- 3% of the excess of the individual's adjusted gross income
over the specified amount, or
- 80% of the amount of itemized deductions otherwise allowable
for the taxable year.
Furthermore, in determining the alternative minimum taxable income of a
holder of a REMIC certificate that is--
- an individual,
- an estate or trust, or
- a Pass-Through Entity beneficially owned by one or more
individuals, estates or trusts,
no deduction will be allowed for the holder's allocable portion of servicing
fees and other miscellaneous itemized deductions of the REMIC, even though an
amount equal to the amount of these fees and other deductions will be included
in the holder's gross income.
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The amount of additional taxable income reportable by holders of REMIC
certificates that are subject to the limitations of either Section 67 or Section
68 of the Internal Revenue Code, or the complete disallowance of the related
expenses for alternative minimum tax purposes, may be substantial.
Accordingly, REMIC certificates to which these expenses are allocated
will generally not be appropriate investments for:
- an individual,
- an estate or trust, or
- a Pass-Through Entity beneficially owned by one or more
individuals, estates or trusts.
We recommend that those prospective investors consult with their tax
advisors prior to making an investment in a REMIC certificate to which these
expenses are allocated.
SALES OF REMIC CERTIFICATES. If a REMIC certificate is sold, the
selling certificateholder will recognize gain or loss equal to the difference
between the amount realized on the sale and its adjusted basis in the REMIC
certificate. The adjusted basis of a REMIC regular certificate generally will
equal:
- the cost of the certificate to that certificateholder,
increased by
- income reported by that certificateholder with respect to the
certificate, including original issue discount and market
discount income, and reduced, but not below zero, by
- payments on the certificate received by that certificateholder
and by that amortized premium.
The adjusted basis of a REMIC residual certificate will be determined
as described above under "--REMICs--Taxation of Owners of REMIC Residual
Certificates--Basis Rules, Net Losses and Distributions." Except as described
below in this "--Sales of REMIC Certificates" subsection, any gain or loss from
your sale of a REMIC certificate will be capital gain or loss, provided that you
hold the certificate as a capital asset within the meaning of Section 1221 of
the Internal Revenue Code, which is generally property held for investment.
In addition to the recognition of gain or loss on actual sales, the
Internal Revenue Code requires the recognition of gain, but not loss, upon the
constructive sale of an appreciated financial position. A constructive sale of
an appreciated financial position occurs if a taxpayer enters into a transaction
or series of transactions that have the effect of substantially eliminating the
taxpayer's risk of loss and opportunity for gain with respect to the financial
instrument. Debt instruments that--
- entitle the holder to a specified principal amount,
- pay interest at a fixed or variable rate, and
- are not convertible into the stock of the issuer or a related
party,
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cannot be the subject of a constructive sale for this purpose. Because most
REMIC regular certificates meet this exception, Section 1259 will not apply to
most REMIC regular certificates. However, REMIC regular certificates that have
no, or a disproportionately small, amount of principal, can be the subject of a
constructive sale.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include the
net capital gain in total net investment income for the taxable year. A taxpayer
would do so because of the rule that limits the deduction of interest on
indebtedness incurred to purchase or carry property held for investment to a
taxpayer's net investment income.
As of the date of this prospectus, the Internal Revenue Code provides
for lower rates as to long-term capital gains than those applicable to the
short-term capital gains and ordinary income recognized or received by
individuals. No similar rate differential exists for corporations. In addition,
the distinction between a capital gain or loss and ordinary income or loss is
relevant for other purposes to both individuals and corporations.
Gain from the sale of a REMIC regular certificate that might otherwise
be a capital gain will be treated as ordinary income to the extent that the gain
does not exceed the excess, if any, of:
- the amount that would have been includible in the seller's
income with respect to that REMIC regular certificate assuming
that income had accrued on the certificate at a rate equal to
110% of the applicable Federal rate determined as of the date
of purchase of the certificate, which is a rate based on an
average of current yields on Treasury securities having a
maturity comparable to that of the certificate based on the
application of the prepayment assumption to the certificate,
over
- the amount of ordinary income actually includible in the
seller's income prior to that sale.
In addition, gain recognized on the sale of a REMIC regular certificate
by a seller who purchased the certificate at a market discount will be taxable
as ordinary income in an amount not exceeding the portion of that discount that
accrued during the period the certificate was held by the seller, reduced by any
market discount included in income under the rules described above under
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Market Discount"
and "--Premium."
REMIC certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Internal Revenue Code, so that gain or loss
recognized from the sale of a REMIC certificate by a bank or thrift institution
to which that section of the Internal Revenue Code applies will be ordinary
income or loss.
A portion of any gain from the sale of a REMIC regular certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that a holder holds the certificate as part of a "conversion transaction" within
the meaning of Section 1258 of the Internal Revenue Code. A conversion
transaction generally is one in which the taxpayer has taken two or more
positions in the same or similar property that reduce or eliminate market risk,
if substantially all of the taxpayer's return is attributable to the time value
of the taxpayer's net investment in that transaction. The amount of gain
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so realized in a conversion transaction that is recharacterized as ordinary
income generally will not exceed the amount of interest that would have accrued
on the taxpayer's net investment at 120% of the appropriate applicable Federal
rate at the time the taxpayer enters into the conversion transaction, subject to
appropriate reduction for prior inclusion of interest and other ordinary income
items from the transaction.
Except as may be provided in Treasury regulations yet to be issued, a
loss realized on the sale of a REMIC residual certificate will be subject to the
"wash sale" rules of Section 1091 of the Internal Revenue Code, if during the
period beginning six months before, and ending six months after, the date of
that sale the seller of that certificate:
- reacquires that same REMIC residual certificate,
- acquires any other residual interest in a REMIC, or
- acquires any similar interest in a taxable mortgage pool, as
defined in Section 7701(i) of the Internal Revenue Code.
In that event, any loss realized by the holder of a REMIC residual certificate
on the sale will not be recognized or deductible currently, but instead will be
added to that holder's adjusted basis in the newly-acquired asset.
PROHIBITED TRANSACTIONS TAX AND OTHER TAXES. The Internal Revenue Code
imposes a tax on REMICs equal to 100% of the net income derived from prohibited
transactions. In general, subject to specified exceptions, a prohibited
transaction includes:
- the disposition of a non-defaulted mortgage loan,
- the receipt of income from a source other than a mortgage loan
or other permitted investments,
- the receipt of compensation for services, or
- the gain from the disposition of an asset purchased with
collections on the mortgage loans for temporary investment
pending payment on the REMIC certificates.
It is not anticipated that any REMIC will engage in any prohibited
transactions as to which it would be subject to this tax.
In addition, some contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property. The related
Governing Document will include provisions designed to prevent the acceptance of
any contributions that would be subject to this tax.
REMICs also are subject to federal income tax at the highest corporate
rate on Net Income From Foreclosure Property, determined by reference to the
rules applicable to REITs.
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The related Governing Documents may permit the special servicer to conduct
activities with respect to a mortgaged property acquired by one of our trusts in
a manner that causes the trust to incur this tax, if doing so would, in the
reasonable discretion of the special servicer, maximize the net after-tax
proceeds to certificateholders. However, under no circumstance may the special
servicer allow the acquired mortgaged property to cease to be a "permitted
investment" under Section 860G(a)(5) of the Internal Revenue Code.
Unless we otherwise disclose in the related prospectus supplement, it
is not anticipated that any material state or local income or franchise tax will
be imposed on any REMIC.
Unless we state otherwise in the related prospectus supplement, and to
the extent permitted by then applicable laws, any tax on prohibited
transactions, particular contributions or Net Income From Foreclosure Property,
and any state or local income or franchise tax, that may be imposed on the REMIC
will be borne by the related trustee, tax administrator, master servicer,
special servicer or manager, in any case out of its own funds, provided that--
- the person has sufficient assets to do so, and
- the tax arises out of a breach of that person's obligations
under the related Governing Document.
Any tax not borne by one of these persons would be charged against the
related trust resulting in a reduction in amounts payable to holders of the
related REMIC certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO
PARTICULAR ORGANIZATIONS. If a REMIC residual certificate is transferred to a
Disqualified Organization, a tax will be imposed in an amount equal to the
product of:
- the present value of the total anticipated excess inclusions
with respect to the REMIC residual certificate for periods
after the transfer, and
- the highest marginal federal income tax rate applicable to
corporations.
The value of the anticipated excess inclusions is discounted using the
applicable Federal rate for obligations whose term ends on the close of the last
quarter in which excess inclusions are expected to accrue with respect to the
REMIC residual certificate.
The anticipated excess inclusions must be determined as of the date
that the REMIC residual certificate is transferred and must be based on:
- events that have occurred up to the time of the transfer,
- the prepayment assumption, and
- any required or permitted clean up calls or required
liquidation provided for in the related Governing Document.
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The tax on transfers to Disqualified Organizations generally would be
imposed on the transferor of the REMIC residual certificate, except when the
transfer is through an agent for a Disqualified Organization. In that case, the
tax would instead be imposed on the agent. However, a transferor of a REMIC
residual certificate would in no event be liable for the tax with respect to a
transfer if:
- the transferee furnishes to the transferor an affidavit that
the transferee is not a Disqualified Organization, and
- as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false.
In addition, if a Pass-Through Entity includes in income excess
inclusions with respect to a REMIC residual certificate, and a Disqualified
Organization is the record holder of an interest in that entity, then a tax will
be imposed on that entity equal to the product of:
- the amount of excess inclusions on the certificate that are
allocable to the interest in the Pass-Through Entity held by
the Disqualified Organization, and
- the highest marginal federal income tax rate imposed on
corporations.
A Pass-Through Entity will not be subject to this tax for any period,
however, if each record holder of an interest in that Pass-Through Entity
furnishes to that Pass-Through Entity:
- the holder's social security number and a statement under
penalties of perjury that the social security number is that
of the record holder, or
- a statement under penalties of perjury that the record holder
is not a Disqualified Organization.
For taxable years beginning on or after January 1, 1998, if an Electing
Large Partnership holds a REMIC residual certificate, all interests in the
Electing Large Partnership are treated as held by Disqualified Organizations for
purposes of the tax imposed on pass-through entities described in the second
preceding paragraph. This tax on Electing Large Partnerships must be paid even
if each record holder of an interest in that partnership provides a statement
mentioned in the prior paragraph.
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In addition, a person holding an interest in a Pass-Through Entity as a
nominee for another person will, with respect to that interest, be treated as a
Pass-Through Entity.
Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that:
- the residual interests in the entity are not held by
Disqualified Organizations, and
- the information necessary for the application of the tax
described in this prospectus will be made available.
We will include in the related Governing Document restrictions on the
transfer of REMIC residual certificates and other provisions that are intended
to meet this requirement, and we will discuss those restrictions and provisions
in any prospectus supplement relating to the offering of any REMIC residual
certificate.
The Clinton Administration recently proposed in its budget amendments
to the REMIC provisions designed to ensure that income taxes imposed on the
holder of a REMIC residual interest are paid when due. Those provisions would
impose secondary liability on the REMIC itself for any tax required to be paid
with respect to the income allocated to a REMIC residual interest if the holder
does not pay its taxes on that income when they are due. If adopted, the
amendments would be effective for
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REMICs created after the date of enactment. It is not possible to predict
whether the legislation will be adopted or, if so, in what form.
TERMINATION. A REMIC will terminate immediately after the payment date
following receipt by the REMIC of the final payment with respect to the related
mortgage loans or upon a sale of the REMIC's assets following the adoption by
the REMIC of a plan of complete liquidation. The last payment on a REMIC regular
certificate will be treated as a payment in retirement of a debt instrument. In
the case of a REMIC residual certificate, if the last payment on that
certificate is less than the REMIC residual certificateholder's adjusted basis
in the certificate, that holder should, but may not, be treated as realizing a
capital loss equal to the amount of that difference.
REPORTING AND OTHER ADMINISTRATIVE MATTERS. Solely for purposes of the
administrative provisions of the Internal Revenue Code, a REMIC will be treated
as a partnership and holders of the related REMIC residual certificates will be
treated as partners. Unless we otherwise state in the related prospectus
supplement, the related tax administrator will file REMIC federal income tax
returns on behalf of the REMIC, and will be designated as and will act as or on
behalf of the tax matters person with respect to the REMIC in all respects. The
related tax administrator may hold at least a nominal amount of REMIC residual
certificates.
As, or as agent for, the tax matters person, the related tax
administrator, subject to applicable notice requirements and various
restrictions and limitations, generally will have the authority to act on behalf
of the REMIC and the holders of the REMIC residual certificates in connection
with the administrative and judicial review of the REMIC's--
- income,
- deductions
- gains,
- losses, and
- classification as a REMIC.
Holders of REMIC residual certificates generally will be required to
report these REMIC items consistently with their treatment on the related
REMIC's tax return. In addition, these holders may in some circumstances be
bound by a settlement agreement between the related tax administrator, as, or as
agent for, the tax matters person, and the IRS concerning any REMIC item.
Adjustments made to the REMIC's tax return may require these holders to make
corresponding adjustments on their returns. An audit of the REMIC's tax return,
or the adjustments resulting from that audit, could result in an audit of a
holder's return.
No REMIC will be registered as a tax shelter under Section 6111 of the
Internal Revenue Code. Any person that holds a REMIC residual certificate as a
nominee for another person may be required to furnish to the related REMIC, in a
manner to be provided in Treasury regulations, the name and address of that
other person, as well as other information.
Reporting of interest income, including any original issue discount,
with respect to REMIC regular certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent or made readily available
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through electronic means to individual holders of REMIC regular certificates and
the IRS. Holders of REMIC regular certificates that are--
- corporations,
- trusts,
- securities dealers, and
- various other non-individuals,
will be provided interest and original issue discount income information and the
information set forth in the following paragraphs. This information will be
provided upon request in accordance with the requirements of the applicable
regulations.
The information must be provided by the later of:
- 30 days after the end of the quarter for which the information
was requested, or
- two weeks after the receipt of the request.
The REMIC must also comply with rules requiring a REMIC regular
certificate issued with original issue discount to disclose on its face the
amount of original issue discount and the issue date, and requiring that
information to be reported to the IRS. Reporting with respect to REMIC residual
certificates, including--
- income,
- excess inclusions,
- investment expenses, and
- relevant information regarding qualification of the REMIC's
assets,
will be made as required under the Treasury regulations, generally on a
quarterly basis.
As applicable, the REMIC regular certificate information reports will
include a statement of the adjusted issue price of the REMIC regular certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, the regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Market Discount."
Unless we otherwise specify in the related prospectus supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the related tax administrator for the subject REMIC.
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BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES. Payments of
interest and principal, as well as payments of proceeds from the sale of REMIC
certificates, may be subject to the backup withholding tax under Section 3406 of
the Internal Revenue Code at a rate of 31% if recipients of these payments:
- fail to furnish to the payor information regarding, among
other things, their taxpayer identification numbers, or
- otherwise fail to establish an exemption from this tax.
Any amounts deducted and withheld from a payment to a recipient would
be allowed as a credit against the recipient's federal income tax. Furthermore,
penalties may be imposed by the IRS on a recipient of payments that is required
to supply information but that does not do so in the proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES. Unless we otherwise
disclose in the related prospectus supplement, a holder of a REMIC regular
certificate that is--
- a foreign person, and
- not subject to federal income tax as a result of any direct or
indirect connection to the United States in addition to its
ownership of that certificate,
will normally not be subject to United States federal income or withholding tax
with respect to a payment on a REMIC regular certificate. To avoid withholding
or tax, that holder must comply with applicable identification requirements.
These requirements include delivery of a statement, signed by the
certificateholder under penalties of perjury, certifying that the
certificateholder is a foreign person and providing the name and address of the
certificateholder.
On October 6, 1997, the Treasury Department issued new regulations that
modify the withholding, backup withholding and information reporting rules
described above. These regulations, as modified by Treasury Decision 8856, will
generally be effective for investments made after December 31, 2000, subject to
applicable transition rules. Prospective investors are urged to consult their
own tax advisors regarding these regulations.
For these purposes, a foreign person is anyone other than a U.S.
Person.
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It is possible that the IRS may assert that the foregoing tax exemption
should not apply with respect to a REMIC regular certificate held by a person or
entity that owns directly or indirectly a 10% or greater interest in the related
REMIC residual certificates. If the holder does not qualify for exemption,
payments of interest, including payments in respect of accrued original issue
discount, to that holder may be subject to a tax rate of 30%, subject to
reduction under any applicable tax treaty.
It is possible, under regulations promulgated under Section 881 of the
Internal Revenue Code concerning conduit financing transactions, that the
exemption from withholding taxes described above may also not be available to a
holder who is a foreign person and either--
- owns 10% or more of one or more underlying mortgagors, or
- if the holder is a controlled foreign corporation, is related
to one or more mortgagors in the applicable trust.
Further, it appears that a REMIC regular certificate would not be
included in the estate of a nonresident alien individual and would not be
subject to United States estate taxes. However, it is recommended that
certificateholders who are nonresident alien individuals consult their tax
advisors concerning this question.
Unless we otherwise state in the related prospectus supplement, the
related Governing Document will prohibit transfers of REMIC residual
certificates to investors that are:
- foreign persons, or
- United States persons, if classified as a partnership under
the Internal Revenue Code, unless all of their beneficial
owners are United States persons.
FASITS
GENERAL. An election may be made to treat the trust for a series of
offered certificates or specified assets of that trust, as a financial asset
securitization investment trust, or FASIT, within the meaning of Section 860L(a)
of the Internal Revenue Code. The election would be noted in the applicable
prospectus supplement. If a FASIT election is made, the offered certificates
will be designated as classes of regular interests in that FASIT, and there will
be one class of ownership interest in the FASIT. With respect to each series of
offered certificates as to which the related tax administrator makes a FASIT
election, and assuming, among other things--
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- the making of an appropriate election, and
- compliance with the related Governing Document,
our counsel will deliver its opinion generally to the effect that:
- the relevant assets will qualify as a FASIT,
- those offered certificates will be FASIT regular certificates,
representing FASIT regular interests in the FASIT, and
- one class of certificates of the same series will be the FASIT
ownership certificates, representing the sole class of
ownership interest in the FASIT.
Only FASIT regular certificates are offered by this prospectus. If so
specified in the applicable prospectus supplement, a portion of the trust for a
series of certificates as to no FASIT election is made may be treated as a
grantor trust for federal income tax purposes. See "--Grantor Trusts."
On February 4, 2000, the Treasury Department issued proposed
regulations relating to FASITs. References to the "FASIT proposed regulations"
in this discussion refer to those proposed regulations. The proposed regulations
have not been adopted as final and, in general, are not proposed to be effective
as of the date of this prospectus. They nevertheless are indicative of the rules
the Treasury Department currently views as appropriate with regard to the FASIT
provisions.
CHARACTERIZATION OF INVESTMENTS IN FASIT REGULAR CERTIFICATES. FASIT
regular certificates held by a real estate investment trust will constitute
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Internal
Revenue Code and interest on the FASIT regular certificates will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Section 856(c)(3)(B) of the Internal
Revenue Code in the same proportion, for both purposes, that the assets and
income of the FASIT would be so treated. FASIT regular certificates held by a
domestic building and loan association will be treated as "regular interest[s]
in a FASIT" under Section 7701(a)(19)(C)(xi) of the Internal Revenue Code, but
only in the proportion that the FASIT holds "loans secured by an interest in
real property which is . . . residential real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Internal Revenue Code. For this purpose,
mortgage loans secured by multifamily residential housing should qualify. It is
also likely that mortgage loans secured by health care related facilities would
qualify as "loans secured by an interest in . . . health institutions or
facilities, including structures designed or used primarily for residential
purposes for . . . persons under care" within the meaning of Section
7701(a)(19)(C)(vii) of the Internal Revenue Code. If at all times 95% or more of
the assets of the FASIT or the income on those assets qualify for the foregoing
treatments, the FASIT regular certificates will qualify for the corresponding
status in their entirety. Mortgage loans which have been defeased with Treasury
obligations and the income
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from those loans will not qualify for the foregoing treatments. Accordingly, the
FASIT regular certificates may not be a suitable investment for you if you
require a specific amount or percentage of assets or income meeting the
foregoing treatments. For purposes of Section 856(c)(4)(A) of the Internal
Revenue Code, payments of principal and interest on a mortgage loan that are
reinvested pending distribution to holders of FASIT regular certificates should
qualify for that treatment. FASIT regular certificates held by a regulated
investment company will not constitute "government securities" within the
meaning of Section 851(b)(4)(A)(i) of the Internal Revenue Code. FASIT regular
certificates held by various financial institutions will constitute an "evidence
of indebtedness" within the meaning of Section 582(c)(1) of the Internal Revenue
Code.
QUALIFICATION AS A FASIT.
GENERAL. In order to qualify as a FASIT, the trust for a series of
offered certificates or specified assets of that trust must comply with the
requirements set forth in the Internal Revenue Code on an ongoing basis. The
FASIT must fulfill an asset test, which requires that substantially all of the
assets of the FASIT, as of, and at all times following, the close of the third
calendar month beginning after the FASIT's startup day, which for purposes of
this discussion is the date of the initial issuance of the FASIT regular
certificates, be permitted assets for a FASIT.
Permitted assets for a FASIT include--
- cash or cash equivalents,
- specified types of debt instruments, other than debt
instruments issued by the owner of the FASIT or a related
party, and contracts to acquire those debt instruments,
- hedges and contracts to acquire hedges,
- foreclosure property, and
- regular interests in another FASIT or in a REMIC.
As discussed below in this "--Qualification as a FASIT" subsection, specified
restrictions apply to each type of permitted asset.
Under the FASIT proposed regulations, the "substantially all"
requirement would be met if at all times the aggregate adjusted basis of the
permitted assets is more than 99 percent of the aggregate adjusted basis of all
the assets held by the FASIT, including assets deemed to be held by the FASIT
under Section 860I(b)(2) of the Internal Revenue Code because they support a
regular interest in the FASIT.
The FASIT provisions also require the FASIT ownership interest to be
held only by some fully taxable domestic corporations and do not recognize
transfers of high-yield regular interests to taxpayers other than fully taxable
domestic corporations or other FASITs. The related Governing Document will
provide that no legal or beneficial interest in the ownership
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interest or in any class or classes of certificates that we determine to be
high-yield regular interests may be transferred or registered unless all
applicable conditions designed to prevent violation of this requirement, are
met.
PERMITTED ASSETS. The proposed regulations enumerate the types of debt
that qualify as permitted assets for a FASIT. The FASIT provisions provide that
permitted debt instruments must bear interest, if any, at a fixed or qualified
variable rate. Under the FASIT proposed regulations, the definition of debt
permitted to be held by a FASIT, would include--
- REMIC regular interests,
- regular interests of other FASITs,
- inflation indexed debt instruments,
- credit card receivables, and
- some stripped bonds and coupons.
However, under the FASIT proposed regulations, equity linked debt instruments
and defaulted debt instruments would not be permitted assets for a FASIT. In
addition, a FASIT may not hold--
- debt of the owner of the FASIT ownership interest,
- debt guaranteed by the owner of the FASIT ownership interest
in circumstances such that the owner is in substance the
primary obligor on the debt instrument, or
- debt issued by third parties that is linked to the performance
or payments of debt instruments issued by the owner or a
related person, are not permitted assets.
Finally, debt that is traded on an established securities market and subject to
a foreign withholding tax is not a permitted asset for a FASIT.
Permitted hedges include interest rate or foreign currency notional
principal contracts, letters of credit, insurance, guarantees of payment default
and similar instruments. These hedges must be reasonably required to guarantee
or hedge against the FASIT's risks associated with being the obligor on
interests issued by the FASIT. The FASIT proposed regulations do not include a
list of specified permitted hedges or guarantees, but rather focus on the
intended function of a hedge and permit the contract to offset the following
risk factors:
- fluctuations in market interest rates;
- fluctuations in currency exchange rates;
- the credit quality of, or default on, the FASIT's assets or
debt instruments underlying the FASIT's assets; and
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- the receipt of payments on the FASIT's assets earlier or later
than originally anticipated.
The FASIT proposed regulations prohibit a hedge or guarantee from
referencing assets other than permitted assets, indices, economic indicators or
financial averages that are not both widely disseminated and designed to
correlate closely with the changes in one or more of the risk factors described
above. However, under the FASIT proposed regulations, FASIT owners will be able
to hold hedges or guarantees inside a FASIT that do not relate to the already
issued regular interests, or to assets the FASIT already holds, if the FASIT
expects to issue regular interests, or expects to hold assets, that are related
to the hedge or guarantee in question. The proposed regulations also place
restrictions on hedges and guarantees entered into with the holder of the FASIT
ownership interest or a related party.
Property acquired in connection with the default or imminent default of
a debt instrument held by a FASIT may qualify both as foreclosure property and
as a type of permitted asset under the FASIT provisions. It will in general
continue to qualify as foreclosure property during a grace period that runs
until the end of the third taxable year beginning after the taxable year in
which the FASIT acquires the foreclosure property. Under the FASIT proposed
regulations, if the foreclosure property also would qualify as another type of
permitted asset, it may be held beyond the close of that grace period. However,
at the close of the grace period, gain, if any, on the property must be
recognized as if the property had been contributed by the owner of the FASIT on
that date. In addition, the FASIT proposed regulations provide that, after the
close of the grace period, disposition of the foreclosure property is
potentially subject to a 100% prohibited transactions tax, without the benefit
of an exception to this tax applicable to sales of foreclosure property.
PERMITTED INTERESTS. In addition to the foregoing, interests in a
FASIT also must meet specified requirements. All of the interests in a FASIT
must be either of the following:
- a single class of ownership interest, or
- one or more classes of regular interests.
An ownership interest is an interest in a FASIT other than a regular
interest that is issued on the startup day, is designated an ownership interest
and is held by a single, fully-taxable, domestic corporation. A regular interest
is an interest in a FASIT that is issued on or after the startup day with fixed
terms, is designated as a regular interest, and--
1. unconditionally entitles the holder to receive a specified
principal amount or other similar amount,
2. provides that interest payments or other similar amounts, if
any, at or before maturity either are payable based on a fixed
rate or a qualified variable rate,
3. has a stated maturity of not longer than 30 years,
4. has an issue price not greater than 125% of its stated
principal amount, and
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5. has a yield to maturity not greater than 5 percentage points
higher than the applicable Federal rate, as defined in Section
1274(d) of the Internal Revenue Code, for Treasury obligations
of a similar maturity.
A regular interest that is described in the preceding sentence except
that it fails to meet one or more of requirements 1, 4 or 5, is a high-yield
regular interest. Further, to be a high-yield regular interest, an interest that
fails requirement 2 must consist of a specified portion of the interest payments
on the permitted assets, determined by reference to the rules related to
permitted rates for REMIC regular interests that have no, or a
disproportionately small, amount of principal. An interest in a FASIT may be
treated as a regular interest even if payments of principal with respect to that
interest are subordinated to payments on other regular interests or the
ownership interest in the FASIT, and are contingent on--
- the absence of defaults or delinquencies on permitted assets,
- lower than reasonably expected returns on permitted assets,
- unanticipated expenses incurred by the FASIT, or
- prepayment interest shortfalls.
CESSATION OF FASIT. If an entity fails to comply with one or more of
the ongoing requirements of the Internal Revenue Code for status as a FASIT
during any taxable year, the Internal Revenue Code provides that the entity or
applicable portion of that entity, will not be treated as a FASIT thereafter. In
this event, any entity that holds mortgage loans and is the obligor with respect
to debt obligations with two or more maturities will be classified, presumably,
as a taxable mortgage pool under general federal income tax principles, and the
FASIT regular certificates may be treated as equity interests in the entity.
Under the FASIT proposed regulations, the underlying arrangement generally
cannot reelect FASIT status and any election a FASIT owner made, other than the
FASIT election, and any method of accounting adopted with respect to the FASIT
assets, binds the underlying arrangement as if the underlying arrangement itself
had made those elections or adopted that method. In the case of an inadvertent
cessation of a FASIT, under the FASIT proposed regulations, the Commissioner of
the IRS may grant relief from the adverse consequences of that cessation,
subject to those adjustments as the Commissioner may require the FASIT and all
holders of interests in the FASIT to accept with respect to the period in which
the FASIT failed to qualify as such.
Under the proposed FASIT regulation, apart from failure to qualify as a
FASIT, a FASIT may not revoke its election or cease to be a FASIT without the
consent of the Commissioner of the IRS.
Regular interest holders, in the case of cessation of a FASIT, are
treated as exchanging their FASIT regular interests for new interests in the
underlying arrangement. The FASIT proposed regulations would classify the new
interests under general principles of Federal income tax law, for example, as
interests in debt instruments, as interest in a partnership or interests in an
entity subject to corporate taxation, depending on what the classification of
those interests would have been in the absence of a FASIT election. On the
deemed receipt of that new interest, under the FASIT proposed regulations, you
would be required to mark the new interests to market and to recognize gain, but
would not be permitted to recognize loss, as though the old interest had been
sold for an amount equal to the
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fair market value of the new interest. Your basis in the new interest deemed
received in the underlying arrangement would equal your basis in the FASIT
regular interest exchanged for it, increased by any gain you recognized on the
deemed exchange.
TAXATION OF FASIT REGULAR CERTIFICATES. The FASIT regular certificates
generally will be treated for federal income tax purposes as newly-originated
debt instruments. In general, subject to the discussion below concerning
high-yield interests:
- interest, original issue discount and market discount on a
FASIT regular certificate will be treated as ordinary income
to the holder of that certificate, and
- principal payments, other than principal payments that do not
exceed accrued market discount, on a FASIT regular certificate
will be treated as a return of capital to the extent of the
holder's basis allocable thereto.
You must use the accrual method of accounting with respect to FASIT
regular certificate, regardless of the method of accounting you otherwise use.
Except as set forth in the applicable prospectus supplement and in the
immediately following discussion concerning high-yield interests, the
discussions above under the headings "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount," "--Market Discount,"
"--Premium," and "--Realized Losses" will apply to the FASIT regular
certificates. The discussion under the headings "--REMICs--Sale of REMIC regular
certificates" will also apply to the FASIT regular certificates, except that the
treatment of a portion of the gain on a REMIC regular interest as ordinary
income to the extent the yield on those certificates did not exceed 110% of the
applicable Federal rate will not apply.
HIGH YIELD INTERESTS; ANTI-AVOIDANCE EXCISE TAXES ON TIERED
ARRANGEMENTS. The taxable income, and the alternative minimum taxable income, of
any holder of a high-yield interest may not be less than the taxable income from
all high-yield interests and FASIT ownership interests that it holds, together
with any excess inclusions with respect to REMIC residual interests that it
owns.
High yield interests may only be held by fully taxable, domestic C
corporations or another FASIT. Any attempted transfer of a high-yield interest
to any other type of taxpayer will be disregarded, and the transferor will be
required to include in its gross income the amount of income attributable to the
high-yield interest notwithstanding its attempted transfer. The related
Governing Document will contain provisions and procedures designed to assure
that, in general, only domestic C corporations or other FASITs may acquire
high-yield interests. There is an exception allowing non-corporate taxpayers
that hold high-yield interest exclusively for sale to customers in the ordinary
course of business to do so, subject to an excise tax imposed at the corporate
income tax rate if the holder ceases to be a dealer or begins to hold the
high-yield interest for investment. Unless otherwise specified in the prospectus
supplement, the related Governing Document will also allow those holders to hold
high-yield interests.
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To prevent the avoidance of these rules through tiered arrangements, an
excise tax is imposed on any Pass-Through Entity, which, under the FASIT
proposed regulations, includes a REMIC, that:
- holds any FASIT regular interest, whether or not that FASIT
regular interest is a high-yield interest; and
- issues a debt or equity interest that is--
1. supported by that FASIT regular interest, and
2. has a yield, higher than the yield on that FASIT
regular interest, that would cause that debt or
equity interest to be a high yield interest if it had
been issued by a FASIT.
Under the statute, the amount of that tax, which is imposed on the
Pass-Through Entity, is the highest corporate income tax rate applied to the
income of the holder of the debt or equity interest properly attributable to
the FASIT regular interest that supports it. The proposed FASIT regulations
provide that the tax is an excise tax that must be paid on or before the due
date of the Pass-Through Entity's tax return for the taxable year in which it
issues that debt or equity interest. This appears to contemplate a one-time
payment on all future income from the FASIT regular interest that is projected
to be properly attributable to the debt or equity interest it supports. It is
not clear how this amount is to be determined.
PROHIBITED TRANSACTIONS AND OTHER TAXES. Income or gain from prohibited
transactions by a FASIT are taxable to the holder of the ownership interest in
that FASIT at a 100% rate. Prohibited transactions generally include, under the
FASIT statutory provisions and proposed FASIT regulations:
- the receipt of income from other than permitted assets;
- the receipt of compensation for services;
- the receipt of any income derived from a loan originated by
the FASIT; or
- the disposition of a permitted asset, including disposition in
connection with a cessation of FASIT status, other than for--
1. foreclosure, default, or imminent default of a
qualified mortgage,
2. bankruptcy or insolvency of the FASIT,
3. substitution for another permitted debt instrument or
distribution of the debt instrument to the holder of
the ownership interest to reduce
overcollateralization, but only if a principal
purpose of acquiring the debt instrument which is
disposed of was not the recognition of gain, or the
reduction of a loss, on the withdrawn asset as a
result of an increase in the market value of the
asset after its acquisition by the FASIT, or
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4. the retirement of a class of FASIT regular interests.
The proposed regulations presume that some transactions will be loan
originations, but also provide safe harbors for loans originated by the FASIT.
The proposed safe harbors apply in the following circumstances:
- if the FASIT acquires the loan from an established securities
market as described in Treasury regulation Sections
1.1273-2(f)(2) through (4),
- if the FASIT acquires the loan more than one year after the
loan was issued,
- if the FASIT acquires the loan from a person that regularly
originates similar loans in the ordinary course of business,
- if the FASIT receives any new loan from the same obligor in
exchange for the obligor's original loan in the context of a
work out, and
- when the FASIT makes a loan under a contract or agreement in
the nature of a line of credit the FASIT is permitted to hold.
The FASIT provisions generally exclude from prohibited transactions the
substitution of a debt instruments for another debt instrument which is a
permitted asset and the distribution of a debt instrument contributed by the
holder of the ownership interest to that holder in order to reduce
over-collateralization of the FASIT. In addition, the FASIT proposed regulations
also exclude transactions involving the disposition of hedges from the category
of prohibited transactions. However, the proposed regulations deem a
distribution of debt to be carried out principally to recognize gain, and to be
a prohibited transaction, if the owner or related person sells the substituted
or distributed debt instrument at a gain within 180 days of the substitution or
distribution. It is unclear the extent to which tax on those transactions could
be collected from the FASIT directly under the applicable statutes rather than
from the holder of the ownership interest. However, under the related Governing
Document, any prohibited transactions tax that is not payable by a party thereto
as a result of its own actions will be paid by the FASIT. It is not anticipated
that the FASIT will engage in any prohibited transactions.
The Clinton Administration recently proposed in its budget amendments
to the FASIT provisions designed to ensure that income taxes imposed on the
holder of a FASIT ownership interest are paid when due. These provisions would
impose secondary liability on the FASIT itself for any tax required to be paid
with respect to the income allocated to the FASIT ownership interest if that
holder does not pay its taxes on that income when they are due. If adopted, the
amendments would be effective for FASITs created after the date of enactment. It
is not possible to predict whether the legislation will be adopted or, if so, in
what form.
TAXATION OF CERTAIN FOREIGN INVESTORS. The federal income tax treatment
of non-U.S. Persons who own FASIT regular certificates that are not high-yield
interests is the same as that described above under "--REMICs--Foreign Investors
in REMIC Regular Certificates." However, if you are a non-U.S. Person and you
hold a regular interest, either directly or indirectly, in a FASIT, you should
note that under the FASIT proposed regulations, interest paid or accrued on a
debt instrument held by the FASIT is
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treated as being received by you directly from a conduit debtor for
purposes of Subtitle A of the Internal Revenue Code and the regulations
thereunder if:
- you are a 10% shareholder of an obligor on a debt instrument
held by the FASIT;
- you are a controlled foreign corporation to which an obligor
on a debt instrument held by the FASIT is a related person; or
- you are related to such an obligor that is a corporation or
partnership, in general, having common ownership to a greater
than 50% extent.
If you believe you may be in one of these categories, you should
consult with your tax advisors, in particular concerning the possible imposition
of United States withholding taxes at a 30% rate on interest paid with respect
to a FASIT regular interest under these circumstances.
High-yield FASIT regular certificates may not be sold to or
beneficially owned by non-U.S. Persons. Any purported transfer to a non-U.S.
Person will be null and void and, upon the related trustee's discovery of any
purported transfer in violation of this requirement, the last preceding owner
of those FASIT regular certificates will be restored to ownership as
completely as possible. The last preceding owner will, in any event, be
taxable on all income with respect to those FASIT regular certificates for
federal income tax purposes. The related Governing Document will provide that,
as a condition to transfer of a high-yield FASIT regular certificate, the
proposed transferee must furnish an affidavit as to its status as a U.S.
Person and otherwise as a permitted transferee.
BACKUP WITHHOLDING. Payments made on the FASIT regular certificates,
and proceeds from the sale of the FASIT regular certificates to or through
some brokers, may be subject to a backup withholding tax under Section 3406
of the Internal Revenue Code in the same manner as described under
"--REMICs--Backup Withholding with Respect to REMIC Certificates" above.
REPORTING REQUIREMENTS. Reports of accrued interest, OID, if any, and
information necessary to compute the accrual of any market discount on the FASIT
regular certificates will be made annually to the IRS and to investors in the
same manner as described above under "--REMICs--Reporting and Other
Administrative Matters" above.
GRANTOR TRUSTS
CLASSIFICATION OF GRANTOR TRUSTS. With respect to each series of
grantor trust certificates, our counsel will deliver its opinion to the effect
that, assuming compliance with all provisions of the related Governing Document,
the related trust, or relevant portion of that trust, will be classified as a
grantor trust under subpart E, part I of subchapter J of the Internal Revenue
Code and not as a partnership or an association taxable as a corporation.
A grantor trust certificate may be classified as either of the
following types of certificate:
- a grantor trust fractional interest certificate representing
an undivided equitable ownership interest in the principal of
the mortgage loans constituting the related grantor
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trust, together with interest on those loans at a pass-through
rate; or
- a grantor trust strip certificate representing ownership of
all or a portion of the difference between--
1. interest paid on the mortgage loans constituting the
related grantor trust, minus
2. the sum of:
- normal administration fees, and
- interest paid to the holders of grantor trust fractional
interest certificates issued with respect to that grantor
trust
A grantor trust strip certificate may also evidence a nominal ownership
interest in the principal of the mortgage loans constituting the related grantor
trust.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES.
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. Unless we otherwise
disclose in the related prospectus supplement, any offered certificates that are
grantor trust fractional interest certificates will generally represent
interests in:
- "loans . . . secured by an interest in real property" within
the meaning of Section 7701(a)(19)(C)(v) of the Internal
Revenue Code, but only to the extent that the underlying
mortgage loans have been made with respect to property that is
used for residential or other prescribed purposes;
- "obligation[s] (including any participation or certificate of
beneficial ownership therein) which . . . [are] principally
secured by an interest in real property" within the meaning of
Section 860G(a)(3) of the Internal Revenue Code;
- "permitted assets" within the meaning of Section 860L(a)(1)(C)
of the Internal Revenue Code; and
- "real estate assets" within the meaning of Section
856(c)(5)(B) of the Internal Revenue Code.
In addition, interest on offered certificates that are grantor trust
fractional interest certificates will, to the same extent, be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Section 856(c)(3)(B) of the Internal
Revenue Code.
GRANTOR TRUST STRIP CERTIFICATES. Even if grantor trust strip
certificates evidence an interest in a grantor trust--
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- consisting of mortgage loans that are "loans . . . secured by
an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Internal Revenue Code,
- consisting of mortgage loans that are "real estate assets"
within the meaning of Section 856(c)(5)(B) of the Internal
Revenue Code, and
- the interest on which is "interest on obligations secured by
mortgages on real property" within the meaning of Section
856(c)(3)(A) of the Internal Revenue Code,
it is unclear whether the grantor trust strip certificates, and the income from
those certificates, will be so characterized. We recommend that prospective
purchasers to which the characterization of an investment in grantor trust strip
certificates is material consult their tax advisors regarding whether the
grantor trust strip certificates, and the income from those certificates, will
be so characterized.
The grantor trust strip certificates will be:
- "obligation[s] (including any participation or certificate of
beneficial ownership therein) which . . . [are] principally
secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Internal Revenue Code, and
- in general, "permitted assets" within the meaning of Section
860L(a)(1)(C) of the Internal Revenue Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
GENERAL. Holders of a particular series of grantor trust fractional
interest certificates generally:
- will be required to report on their federal income tax returns
their shares of the entire income from the underlying mortgage
loans, including amounts used to pay reasonable servicing fees
and other expenses, and
- will be entitled to deduct their shares of any reasonable
servicing fees and other expenses.
Because of stripped interests, market or original issue discount, or
premium, the amount includible in income on account of a grantor trust
fractional interest certificate may differ significantly from interest paid or
accrued on the underlying mortgage loans.
Section 67 of the Internal Revenue Code allows an individual, estate or
trust holding a grantor trust fractional interest certificate directly or
through some types of pass-through entities a deduction for any reasonable
servicing fees and expenses only to the extent that the total of the holder's
miscellaneous itemized deductions exceeds two percent of the holder's adjusted
gross income.
Section 68 of the Internal Revenue Code reduces the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount by the lesser of:
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- 3% of the excess of the individual's adjusted gross income
over that amount, and
- 80% of the amount of itemized deductions otherwise allowable
for the taxable year.
The amount of additional taxable income reportable by holders of
grantor trust fractional interest certificates who are subject to the
limitations of either Section 67 or Section 68 of the Internal Revenue Code may
be substantial. Further, certificateholders, other than corporations, subject to
the alternative minimum tax may not deduct miscellaneous itemized deductions in
determining their alternative minimum taxable income.
Although it is not entirely clear, it appears that in transactions in
which multiple classes of grantor trust certificates, including grantor trust
strip certificates, are issued, any fees and expenses should be allocated among
those classes of grantor trust certificates. The method of this allocation
should recognize that each class benefits from the related services. In the
absence of statutory or administrative clarification as to the method to be
used, we currently expect that information returns or reports to the IRS and
certificateholders will be based on a method that allocates these fees and
expenses among classes of grantor trust certificates with respect to each period
based on the payments made to each class during that period.
The federal income tax treatment of grantor trust fractional interest
certificates of any series will depend on whether they are subject to the
stripped bond rules of Section 1286 of the Internal Revenue Code. Grantor trust
fractional interest certificates may be subject to those rules if:
- a class of grantor trust strip certificates is issued as part
of the same series, or
- we or any of our affiliates retain, for our or its own account
or for purposes of resale, a right to receive a specified
portion of the interest payable on an underlying mortgage
loan.
Further, the IRS has ruled that an unreasonably high servicing fee
retained by a seller or servicer will be treated as a retained ownership
interest in mortgage loans that constitutes a stripped coupon. We will include
in the related prospectus supplement information regarding servicing fees paid
out of the assets of the related trust to:
- a master servicer,
- a special servicer,
- any sub-servicer, or
- their respective affiliates.
IF STRIPPED BOND RULES APPLY. If the stripped bond rules apply, each
grantor trust fractional interest certificate will be treated as having been
issued with original issue discount within the meaning of Section 1273(a) of the
Internal Revenue Code. This is subject, however, to the discussion below
regarding:
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- the treatment of some stripped bonds as market discount bonds,
and
- DE MINIMIS market discount.
See "--Grantor Trust Funds--Taxation of Owners of Grantor Trust
Fractional Interest Certificates--Market Discount" below.
Under the stripped bond rules, the holder of a grantor trust fractional
interest certificate, whether a cash or accrual method taxpayer, will be
required to report interest income from its grantor trust fractional interest
certificate for each month. The amount of reportable interest income must equal
the income that accrues on the certificate in that month calculated under a
constant yield method, in accordance with the rules of the Internal Revenue Code
relating to original issue discount.
The original issue discount on a grantor trust fractional interest
certificate will be the excess of the certificate's stated redemption price over
its issue price. The issue price of a grantor trust fractional interest
certificate as to any purchaser will be equal to the price paid by that
purchaser of the grantor trust fractional interest certificate. The stated
redemption price of a grantor trust fractional interest certificate will be the
sum of all payments to be made on that certificate, other than qualified stated
interest, if any, and the certificate's share of reasonable servicing fees and
other expenses.
See "--Grantor Trust Funds--Taxation of Owners of Grantor Trust
Fractional Interest Certificates--If Stripped Bond Rules Do Not Apply" for a
definition of "qualified stated interest." In general, the amount of that income
that accrues in any month would equal the product of:
- the holder's adjusted basis in the grantor trust fractional
interest certificate at the beginning of the related month, as
defined in "--Grantor Trust Funds--Sales of Grantor Trust
Certificates," and
- the yield of that grantor trust fractional interest
certificate to the holder.
The yield would be computed as the rate, that, if used to discount the
holder's share of future payments on the related mortgage loans, would cause the
present value of those future payments to equal the price at which the holder
purchased the certificate. This rate is compounded based on the regular interval
between payment dates. In computing yield under the stripped bond rules, a
certificateholder's share of future payments on the related mortgage loans will
not include any payments made with respect to any ownership interest in those
mortgage loans retained by us, a master servicer, a special servicer, a
sub-servicer or our or their respective affiliates, but will include the
certificateholder's share of any reasonable servicing fees and other expenses.
With respect to some categories of debt instruments, Section 1272(a)(6)
of the Internal Revenue Code requires the use of a reasonable prepayment
assumption in accruing original issue discount, and adjustments in the accrual
of original issue discount when prepayments do not conform to the prepayment
assumption.
Legislation enacted in 1997 extended the scope of that section to any
pool of debt instruments the yield on which may be affected by reason of
prepayments, effective for taxable years beginning after enactment. The precise
application of this legislation is unclear in some respects. For example, it is
uncertain whether a prepayment assumption will be applied collectively to all a
taxpayer's
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investments in pools of debt instruments, or on an investment-by-investment
basis. Similarly, it is not clear whether the assumed prepayment rate as to
investments in grantor trust fractional interest certificates is to be
determined based on conditions at the time of the first sale of the certificate
or, with respect to any holder, at the time of purchase of the certificate by
that holder.
We recommend that certificateholders consult their tax advisors
concerning reporting original issue discount with respect to grantor trust
fractional interest certificates.
In the case of a grantor trust fractional interest certificate acquired
at a price equal to the principal amount of the related mortgage loans allocable
to that certificate, the use of a prepayment assumption generally would not have
any significant effect on the yield used in calculating accruals of interest
income. In the case, however, of a grantor trust fractional interest certificate
acquired at a price less than or greater than the principal amount,
respectively, the use of a reasonable prepayment assumption would increase or
decrease the yield. Therefore, the use of this prepayment assumption would
accelerate or decelerate, respectively, the reporting of income.
In the absence of statutory or administrative clarification, we
currently expect that information reports or returns to the IRS and
certificateholders will be based on:
- a prepayment assumption determined when certificates are
offered and sold hereunder, which we will disclose in the
related prospectus supplement, and
- a constant yield computed using a representative initial
offering price for each class of certificates.
However, neither we nor any other person will make any representation
that--
- the mortgage loans in any of our trusts will in fact prepay at
a rate conforming to the prepayment assumption used or any
other rate, or
- the prepayment assumption will not be challenged by the IRS on
audit.
Certificateholders also should bear in mind that the use of a
representative initial offering price will mean that the information returns or
reports that we send, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial certificateholders of each series
who bought at that price.
Under Treasury Regulation Section 1.1286-1, some stripped bonds are to
be treated as market discount bonds. Accordingly, any purchaser of that bond
is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon:
- there is no original issue discount or only a DE MINIMIS
amount of original issue discount, or
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- the annual stated rate of interest payable on the original
bond is no more than one percentage point lower than the gross
interest rate payable on the related mortgage loans, before
subtracting any servicing fee or any stripped coupon.
If interest payable on a grantor trust fractional interest certificate
is more than one percentage point lower than the gross interest rate payable on
the related mortgage loans, we will disclose that fact in the related prospectus
supplement. If the original issue discount or market discount on a grantor trust
fractional interest certificate determined under the stripped bond rules is less
than the product of:
- 0.25% of the stated redemption price, and
- the weighted average maturity of the related mortgage loans,
then the original issue discount or market discount will be considered to be DE
MINIMIS. Original issue discount or market discount of only a DE MINIMIS amount
will be included in income in the same manner as DE MINIMIS original issue
discount and market discount described in "--Grantor Trust Funds--Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules
Do Not Apply" and "--Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a grantor
trust fractional interest certificate, the certificateholder will be required to
report its share of the interest income on the related mortgage loans in
accordance with the certificateholder's normal method of accounting. In that
case, the original issue discount rules will apply, even if the stripped bond
rules do not apply, to a grantor trust fractional interest certificate to the
extent it evidences an interest in mortgage loans issued with original issue
discount.
The original issue discount, if any, on mortgage loans will equal the
difference between:
- the stated redemption price of the mortgage loans, and
- their issue price.
For a definition of "stated redemption price," see "--REMICs--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount" above. In
general, the issue price of a mortgage loan will be the amount received by the
borrower from the lender under the terms of the mortgage loan. If the borrower
separately pays points to the lender that are not paid for services provided by
the lender, such as commitment fees or loan processing costs, the amount of
those points paid reduces the issue price.
The stated redemption price of a mortgage loan will generally equal its
principal amount. The determination as to whether original issue discount will
be considered to be DE MINIMIS will be calculated using the same test as in the
REMIC discussion. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above.
In the case of mortgage loans bearing adjustable or variable interest
rates, we will describe in the related prospectus supplement the manner in which
these rules will be applied with respect to the mortgage loans by the related
trustee or master servicer, as applicable, in preparing information returns to
certificateholders and the IRS.
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If original issue discount is in excess of a DE MINIMIS amount, all
original issue discount with respect to a mortgage loan will be required to be
accrued and reported in income each month, based on a constant yield. Under
legislation enacted in 1997, Section 1272(a)(6) of the Internal Revenue Code
requires that a prepayment assumption be used in computing yield with respect to
any pool of debt instruments, the yield on which may be affected by prepayments.
The precise application of this legislation is unclear in some respects. For
example, it is uncertain whether a prepayment assumption will be applied
collectively to all a taxpayer's investments in pools of debt instruments, or
will be applied on an investment-by-investment basis. Similarly, it is not clear
whether the assumed prepayment rate as to investments in grantor trust
fractional interest certificates is to be determined based on conditions at the
time of the first sale of the certificate or, with respect to any holder, at the
time of purchase of the certificate by that holder. We recommend that
certificateholders consult their own tax advisors concerning reporting original
issue discount with respect to grantor trust fractional interest certificates.
A purchaser of a grantor trust fractional interest certificate may
purchase the grantor trust fractional interest certificate at a cost less than
the certificate's allocable portion of the total remaining stated redemption
price of the underlying mortgage loans. In that case, the purchaser will also be
required to include in gross income the certificate's daily portions of any
original issue discount with respect to those mortgage loans. However, each
daily portion will be reduced, if the cost of the grantor trust fractional
interest certificate to the purchaser is in excess of the certificate's
allocable portion of the aggregate adjusted issue prices of the underlying
mortgage loans. The reduction will be approximately in proportion to the ratio
that the excess bears to the certificate's allocable portion of the total
original issue discount remaining to be accrued on those mortgage loans.
The adjusted issue price of a mortgage loan on any given day equals the
sum of:
- the adjusted issue price or the issue price, in the case of
the first accrual period, of the mortgage loan at the
beginning of the accrual period that includes that day, and
- the daily portions of original issue discount for all days
during the accrual period prior to that day.
The adjusted issue price of a mortgage loan at the beginning of any
accrual period will equal:
- the issue price of the mortgage loan, increased by
- the total amount of original issue discount with respect to
the mortgage loan that accrued in prior accrual periods, and
reduced by
- the amount of any payments made on the mortgage loan in prior
accrual periods of amounts included in its stated redemption
price.
In the absence of statutory or administrative clarification, we
currently expect that information reports or returns to the IRS and
certificateholders will be based on:
- a prepayment assumption determined when the certificates are
offered and sold hereunder and disclosed in the related
prospectus supplement, and
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- a constant yield computed using a representative initial
offering price for each class of certificates.
However, neither we nor any other person will make any representation
that--
- the mortgage loans will in fact prepay at a rate conforming to
the prepayment assumption or any other rate, or
- the prepayment assumption will not be challenged by the IRS on
audit.
Certificateholders also should bear in mind that the use of a
representative initial offering price will mean that the information returns or
reports, even if otherwise accepted as accurate by the IRS, will in any event be
accurate only as to the initial certificateholders of each series who bought at
that price.
MARKET DISCOUNT. If the stripped bond rules do not apply to a grantor
trust fractional interest certificate, a certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Internal Revenue Code
to the extent an interest in a mortgage loan is considered to have been
purchased at a market discount. A mortgage loan is considered to have been
purchased at a market discount if--
- in the case of a mortgage loan issued without original issue
discount, it is purchased at a price less than its remaining
stated redemption price, or
- in the case of a mortgage loan issued with original issue
discount, it is purchased at a price less than its adjusted
issue price.
If market discount is in excess of a DE MINIMIS amount, the holder
generally must include in income in each month the amount of the discount that
has accrued, under the rules described in the next paragraph, through that month
that has not previously been included in income. The inclusion will be limited,
in the case of the portion of the discount that is allocable to any mortgage
loan, to the payment of stated redemption price on the mortgage loan that is
received by or, for accrual method certificateholders, due to the trust in that
month. A certificateholder may elect to include market discount in income
currently as it accrues, under a constant yield method based on the yield of the
certificate to the holder, rather than including it on a deferred basis in
accordance with the foregoing under rules similar to those described in
"--REMICs--Taxation of Owners of REMIC Regular Interests--Market Discount"
above.
Section 1276(b)(3) of the Internal Revenue Code authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until the time that regulations are issued by the Treasury
Department, the relevant rules described in the Committee Report apply. Under
those rules, in each accrual period, you may accrue market discount on the
underlying mortgage loans, at your option:
- on the basis of a constant yield method,
- in the case of a mortgage loan issued without original issue
discount, in an amount that bears the same ratio to the total
remaining market discount as the stated interest paid
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in the accrual period bears to the total stated interest
remaining to be paid on the mortgage loan as of the beginning
of the accrual period, or
- in the case of a mortgage loan issued with original issue
discount, in an amount that bears the same ratio to the total
remaining market discount as the original issue discount
accrued in the accrual period bears to the total original
issue discount remaining at the beginning of the accrual
period.
Under legislation enacted in 1997, Section 1272(a)(6) of the Internal
Revenue Code requires that a prepayment assumption be used in computing the
accrual of original issue discount with respect to any pool of debt instruments,
the yield on which may be affected by prepayments. Because the mortgage loans
will be a pool described in that section, it appears that the prepayment
assumption used, or that would be used, in calculating the accrual of original
issue discount, if any, is also to be used in calculating the accrual of market
discount. However, the precise application of the new legislation is unclear in
some respects. For example, it is uncertain whether a prepayment assumption will
be applied collectively to all of a taxpayer's investments in pools of debt
instruments, or on an investment-by-investment basis. Similarly, it is not clear
whether the assumed prepayment rate is to be determined at the time of the first
sale of the grantor trust fractional interest certificate, or with respect to
any holder, at the time of that holder's purchase of the grantor trust
fractional interest certificate.
We recommend that certificateholders consult their own tax advisors
concerning accrual of market discount with respect to grantor trust fractional
interest certificates. Certificateholders should also refer to the related
prospectus supplement to determine whether and in what manner the market
discount will apply to the underlying mortgage loans purchased at a market
discount.
To the extent that the underlying mortgage loans provide for periodic
payments of stated redemption price, you may be required to include market
discount in income at a rate that is not significantly slower than the rate at
which that discount would be included in income if it were original issue
discount.
Market discount with respect to mortgage loans may be considered to be
DE MINIMIS and, if so, will be includible in income under DE MINIMIS rules
similar to those described under "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above.
Further, under the rules described under "--REMICs--Taxation of Owners
of REMIC Regular Certificates--Market Discount" above, any discount that is not
original issue discount and exceeds a DE MINIMIS amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the underlying mortgage loans.
PREMIUM. If a certificateholder is treated as acquiring the underlying
mortgage loans at a premium, which is a price in excess of their remaining
stated redemption price, the certificateholder may elect under Section 171 of
the Internal Revenue Code to amortize the portion of that premium allocable to
mortgage loans originated after September 27, 1985 using a constant yield
method. Amortizable premium is treated as an offset to interest income on the
related debt instrument, rather than as a separate
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interest deduction. However, premium allocable to mortgage loans originated
before September 28, 1985 or to mortgage loans for which an amortization
election is not made, should:
- be allocated among the payments of stated redemption price on
the mortgage loan, and
- be allowed as a deduction as those payments are made or, for
an accrual method certificateholder, due.
It appears that a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Internal Revenue Code
similar to that described for calculating the accrual of market discount of
grantor trust fractional interest certificates. See "--Grantor Trust
Funds--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--Market Discount" above.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES. The stripped
coupon rules of Section 1286 of the Internal Revenue Code will apply to the
grantor trust strip certificates. Except as described above under "--Grantor
Trust Funds--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--If Stripped Bond Rules Apply," no regulations or published rulings
under Section 1286 of the Internal Revenue Code have been issued and some
uncertainty exists as to how it will be applied to securities, such as the
grantor trust strip certificates. Accordingly, we recommend that you consult
your tax advisors concerning the method to be used in reporting income or loss
with respect to those certificates.
The Treasury regulations promulgated under the original discount rules
do not apply to stripped coupons, although they provide general guidance as to
how the original issue discount sections of the Internal Revenue Code will be
applied.
Under the stripped coupon rules, it appears that original issue
discount will be required to be accrued in each month on the grantor trust strip
certificates based on a constant yield method. In effect, you would include as
interest income in each month an amount equal to the product of your adjusted
basis in the grantor trust strip certificate at the beginning of that month and
the yield of the grantor trust strip certificate to you. This yield would be
calculated based on:
- the price paid for that grantor trust strip certificate by
you, and
- the projected payments remaining to be made on that grantor
trust strip certificate at the time of the purchase, plus
- an allocable portion of the projected servicing fees and
expenses to be paid with respect to the underlying mortgage
loans.
See "--Grantor Trust Funds--Taxation of Owners of Grantor Trust
Fractional Interest Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Internal Revenue Code
requires that a prepayment assumption be used in computing the accrual of
original issue discount with respect to some categories of debt instruments. The
Internal Revenue Code also requires adjustments be made in the amount and rate
of accrual of that discount when prepayments do not conform to the prepayment
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assumption. It appears that those provisions would apply to grantor trust strip
certificates. It is uncertain whether the assumed prepayment rate would be
determined based on:
- conditions at the time of the first sale of the grantor trust
strip certificate or,
- with respect to any subsequent holder, at the time of purchase
of the grantor trust strip certificate by that holder.
If the method for computing original issue discount under Section
1272(a)(6) results in a negative amount of original issue discount as to any
accrual period with respect to a grantor trust strip certificate, the amount of
original issue discount allocable to that accrual period will be zero. That is,
no current deduction of the negative amount will be allowed to you. You will
instead only be permitted to offset that negative amount against future positive
original issue discount, if any, attributable to that certificate. Although not
free from doubt, it is possible that you may be permitted to deduct a loss to
the extent his or her basis in the certificate exceeds the maximum amount of
payments you could ever receive with respect to that certificate. However, the
loss may be a capital loss, which is limited in its deductibility. The foregoing
considerations are particularly relevant to grantor trust certificates with no,
or disproportionately small, amounts of principal, which can have negative
yields under circumstances that are not default related. See "Risk Factors--The
Investment Performance of Your Offered Certificates Depend Upon Payments,
Defaults and Losses on the Underlying Mortgage Loans".
The accrual of income on the grantor trust strip certificates will be
significantly slower using a prepayment assumption than if yield is computed
assuming no prepayments. In the absence of statutory or administrative
clarification, we currently expect that information returns or reports to the
IRS and certificateholders will be based on:
- the prepayment assumption we will disclose in the related
prospectus supplement, and
- a constant yield computed using a representative initial
offering price for each class of certificates.
However, neither we nor any other person will make any representation
that--
- the mortgage loans in any of our trusts will in fact prepay at
a rate conforming to the prepayment assumption or at any other
rate or
- the prepayment assumption will not be challenged by the IRS on
audit.
We recommend that prospective purchasers of the grantor trust strip
certificates consult their tax advisors regarding the use of the prepayment
assumption.
Certificateholders also should bear in mind that the use of a
representative initial offering price will mean that the information returns or
reports, even if otherwise accepted as accurate by the IRS, will in any event be
accurate only as to the initial certificateholders of each series who bought at
that price.
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SALES OF GRANTOR TRUST CERTIFICATES. Any gain or loss recognized on the
sale or exchange of a grantor trust certificate by an investor who holds that
certificate as a capital asset, will be capital gain or loss, except as
described below in this "--Sales of Grantor Trust Certificates" subsection. The
amount recognized equals the difference between:
- the amount realized on the sale or exchange of a grantor trust
certificate, and
- its adjusted basis.
The adjusted basis of a grantor trust certificate generally will equal:
- its cost, increased by
- any income reported by the seller, including original issue
discount and market discount income, and reduced, but not
below zero, by
- any and all previously reported losses, amortized premium, and
payments with respect to that grantor trust certificate.
As of the date of this prospectus, the Internal Revenue Code provides
for lower rates as to long-term capital gains, than those applicable to the
short-term capital gains and ordinary income realized or received by
individuals. No similar rate differential exists for corporations. In addition,
the distinction between a capital gain or loss and ordinary income or loss
remains relevant for other purposes.
Gain or loss from the sale of a grantor trust certificate may be
partially or wholly ordinary and not capital in some circumstances. Gain
attributable to accrued and unrecognized market discount will be treated as
ordinary income. Gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Internal Revenue Code will be
treated as ordinary income.
Furthermore, a portion of any gain that might otherwise be capital gain
may be treated as ordinary income to the extent that the grantor trust
certificate is held as part of a "conversion transaction" within the meaning of
Section 1258 of the Internal Revenue Code. A conversion transaction generally is
one in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in the transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate applicable Federal rate at the time the taxpayer
enters into the conversion transaction, subject to appropriate reduction for
prior inclusion of interest and other ordinary income items from the
transaction.
The Internal Revenue Code requires the recognition of gain upon the
constructive sale of an appreciated financial position. A constructive sale of
an appreciated financial position occurs if a taxpayer enters into a transaction
or series of transactions that have the effect of substantially eliminating the
taxpayer's risk of loss and opportunity for gain with respect to the financial
instrument. Debt instruments that--
- entitle the holder to a specified principal amount,
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- pay interest at a fixed or variable rate, and
- are not convertible into the stock of the issuer or a related
party,
cannot be the subject of a constructive sale for this purpose. Because most
grantor trust certificates meet this exception, this Section will not apply to
most grantor trust certificates. However, some grantor trust certificates have
no, or a disproportionately small amount of, principal and these certificates
can be the subject of a constructive sale.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include the
net capital gain in total net investment income for the relevant taxable year.
This election would be done for purposes of the rule that limits the deduction
of interest on indebtedness incurred to purchase or carry property held for
investment to a taxpayer's net investment income.
GRANTOR TRUST REPORTING. Unless otherwise provided in the related
prospectus supplement, the related tax administrator will furnish or make
readily available through electronic means to each holder of a grantor trust
certificate with each payment a statement setting forth the amount of the
payment allocable to principal on the underlying mortgage loans and to interest
on those loans at the related pass-through rate. In addition, the related tax
administrator will furnish, within a reasonable time after the end of each
calendar year, to each person or entity that was the holder of a grantor trust
certificate at any time during that year, information regarding:
- the amount of servicing compensation received by a master
servicer or special servicer, and
- all other customary factual information the reporting party
deems necessary or desirable to enable holders of the related
grantor trust certificates to prepare their tax returns.
The reporting party will furnish comparable information to the IRS as
and when required by law to do so.
Because the rules for accruing discount and amortizing premium with
respect to grantor trust certificates are uncertain in various respects, there
is no assurance the IRS will agree with the information reports of those items
of income and expense. Moreover, those information reports, even if otherwise
accepted as accurate by the IRS, will in any event be accurate only as to the
initial certificateholders that bought their certificates at the representative
initial offering price used in preparing the reports.
On August 13, 1998, the Service published proposed regulations, which
will, when effective, establish a reporting framework for interests in "widely
held fixed investment trusts" similar to that for regular interests in REMICs. A
widely-held fixed investment trust is defined as any entity classified as a
"trust" under Treasury Regulation Section 301.7701-4(c) in which any interest is
held by a middleman, which includes, but is not limited to:
- a custodian of a person's account,
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- a nominee, and
- a broker holding an interest for a customer in street name.
These regulations are proposed to be effective for calendar years
beginning on or after the date that the final regulations are published in the
Federal Register.
BACKUP WITHHOLDING. In general, the rules described under
"--REMICs--Backup Withholding with Respect to REMIC Certificates" above will
also apply to grantor trust certificates.
FOREIGN INVESTORS. In general, the discussion with respect to REMIC
regular certificates under "--REMICs--Foreign Investors in REMIC Certificates"
above applies to grantor trust certificates. However, unless we otherwise
specify in the related prospectus supplement, grantor trust certificates will be
eligible for exemption from U.S. withholding tax, subject to the conditions
described in the discussion above, only to the extent the related mortgage loans
were originated after July 18, 1984.
To the extent that interest on a grantor trust certificate would be
exempt under Sections 871(h)(1) and 881(c) of the Internal Revenue Code from
United States withholding tax, and the certificate is not held in connection
with a certificateholder's trade or business in the United States, the
certificate will not be subject to United States estate taxes in the estate of a
nonresident alien individual.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences concerning the offered certificates. State tax law
may differ substantially from the corresponding federal law, and the discussion
above does not purport to describe any aspect of the tax laws of any state or
other jurisdiction. Therefore, we recommend that prospective investors consult
their tax advisors with respect to the various tax consequences of investments
in the offered certificates.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended,
and the Internal Revenue Code of 1986 impose various requirements on--
- ERISA Plans, and
- persons that are fiduciaries with respect to ERISA Plans,
in connection with the investment of the assets of an ERISA Plan. For purposes
of this discussion, ERISA Plans may include individual retirement accounts and
annuities, Keogh plans and
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collective investment funds and separate accounts, including as applicable,
insurance company general accounts, in which other ERISA Plans are invested.
Governmental plans and, if they have not made an election under Section
410(d) of the Internal Revenue Code of 1986, church plans are not subject to
ERISA requirements. Accordingly, assets of those plans may be invested in the
offered certificates without regard to the considerations described below in
this "ERISA Considerations" section, subject to the provisions of other
applicable federal and state law. Any of those plans which is qualified and
exempt from taxation under Sections 401(a) and 501(a) of the Internal Revenue
Code of 1986, however, is subject to the prohibited transaction rules in Section
503 of that Code.
ERISA imposes general fiduciary requirements on a fiduciary that is
investing the assets of an ERISA Plan, including--
- investment prudence and diversification, and
- compliance with the investing ERISA Plan's governing the
documents.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code of
1986 also prohibit a broad range of transactions involving the assets of an
ERISA Plan and a Party in Interest with respect to that ERISA Plan, unless a
statutory or administrative exemption exists.
The types of transactions between ERISA Plans and Parties in Interest
that are prohibited include:
- sales, exchanges or leases of property;
- loans or other extensions of credit; and
- the furnishing of goods and services.
Parties in Interest that participate in a prohibited transaction may be
subject to an excise tax imposed under Section 4975 of the Internal Revenue Code
of 1986 or a penalty imposed under Section 502(i) of ERISA, unless a statutory
or administrative exemption is available. In addition, the persons involved in
the prohibited transaction may have to cancel the transaction and pay an amount
to the affected ERISA Plan for any losses realized by that ERISA Plan or profits
realized by those persons. In addition, individual retirement accounts involved
in the prohibited transaction may be disqualified which would result in adverse
tax consequences to the owner of the account.
PLAN ASSET REGULATIONS
An ERISA Plan's investment in offered certificates may cause the
underlying mortgage assets and other assets of the related trust to be deemed
assets of that ERISA Plan. Section 2510.3-101 of the Plan Asset Regulations
provides that when an ERISA Plan acquires an equity interest in an entity, the
assets that ERISA Plan or arrangement include both that equity interest and an
undivided interest in each of the
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underlying assets of the entity, unless an exception applies. One exemption is
that the equity participation in the entity by benefit plan investors, which
include both ERISA Plans and some employee benefit plans not subject to ERISA,
is not significant. The equity participation by benefit plan investors will be
significant on any date if 25% or more of the value of any class of equity
interests in the entity is held by benefit plan investors. The percentage
owned by benefit plan investors is determined by excluding the investments of
the following persons:
1. those with discretionary authority or control over the assets
of the entity,
2. those who provide investment advice directly or indirectly for
a fee with respect to the assets of the entity, and
3. those who are affiliates of the persons described in the
preceding clauses 1. and 2.
In the case of one of our trusts, investments by us, by the related
trustee, the related master servicer, the related special servicer or any other
party with discretionary authority over the related trust assets, or by the
affiliates of these persons, will be excluded.
A fiduciary of an investing ERISA Plan is any person who--
- has discretionary authority or control over the management or
disposition of the assets of that ERISA Plan, or
- provides investment advice with respect to the assets of that
ERISA Plan for a fee.
If the mortgage and other assets included in one of our trusts are
ERISA Plan assets, then any party exercising management or discretionary control
regarding those assets, such as the related trustee, master servicer or special
servicer, or affiliates of any of these parties, may be--
- deemed to be a fiduciary with respect to the investing ERISA
Plan, and
- subject to the fiduciary responsibility provisions of ERISA.
In addition, if the mortgage and other assets included in one of our trusts are
ERISA Plan assets, then the operation of that trust may involve prohibited
transactions under ERISA or the Internal Revenue Code of 1986. For example, if a
borrower with respect to a mortgage loan in that trust is a Party in Interest to
an investing ERISA Plan, then the purchase by that ERISA Plan of offered
certificates evidencing interests in that trust, could be a prohibited loan
between that ERISA Plan and the Party in Interest.
The Plan Asset Regulations provide that where an ERISA Plan purchases a
"guaranteed governmental mortgage pool certificate," the assets of that ERISA
Plan include the certificate but do not include any of the mortgages underlying
the certificate. The Plan Asset Regulations include in the definition of a
"guaranteed governmental mortgage pool certificate" some certificates issued
and/or guaranteed by Freddie Mac, Ginnie Mae and Fannie Mae, but do not include
certificates issued or guaranteed by Farmer Mac. Accordingly, even if these
types of mortgaged-backed securities, other than the Farmer Mac certificates,
were deemed to be assets
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of an ERISA Plan, the underlying mortgages would not be treated as assets of
that ERISA Plan. Private label mortgage participations, mortgage pass-through
certificates, Farmer Mac certificates or other mortgage-backed securities are
not "guaranteed governmental mortgage pool certificates" within the meaning of
the Plan Asset Regulations.
In addition, the acquisition or holding of offered certificates by or
on behalf of an ERISA Plan could give rise to a prohibited transaction if we or
the related trustee, master servicer or special servicer or any related
underwriter, sub-servicer, tax administrator, manager, borrower or obligor under
any credit enhancement mechanism, or one of their affiliates, is or becomes a
Party in Interest with respect to an investing ERISA Plan.
If you are the fiduciary of an ERISA Plan, you should consult your
counsel and review the ERISA discussion in the related prospectus supplement
before purchasing any offered certificates.
PROHIBITED TRANSACTION EXEMPTIONS
If you are an ERISA Plan fiduciary, then, in connection with your
deciding whether to purchase any of the offered certificates on behalf of an
ERISA Plan, you should consider the availability of one of the following
prohibited transaction class exemptions issued by the U.S. Department of Labor:
- Prohibited Transaction Class Exemption 75-1, which exempts
particular transactions involving ERISA Plans and
broker-dealers, reporting dealers and banks;
- Prohibited Transaction Class Exemption 90-1, which exempts
particular transactions between insurance company separate
accounts and Parties in Interest;
- Prohibited Transaction Class Exemption 91-38, which exempts
particular transactions between bank collective investment
funds and Parties in Interest;
- Prohibited Transaction Class Exemption 84-14, which exempts
particular transactions effected on behalf of an ERISA Plan
by a "qualified professional asset manager;"
- Prohibited Transaction Class Exemption 95-60, which exempts
particular transactions between insurance company general
accounts and Parties in Interest; and
- Prohibited Transaction Class Exemption 96-23, which exempts
particular transactions effected on behalf of an ERISA Plan
by an "in-house asset manager."
We cannot provide any assurance that any of these class exemptions will
apply with respect to any particular investment by or on behalf of an ERISA Plan
in any class of offered certificates. Furthermore, even if any of them were
deemed to apply, that particular class exemption may not apply to all
transactions that could occur in connection with the investment. The prospectus
supplement with respect to the offered certificates of any series may contain
additional information regarding the availability of other exemptions, with
respect to those certificates.
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UNDERWRITER'S EXEMPTION
It is expected that Lehman Brothers Inc. will be the sole, lead or
co-lead underwriter in each underwritten offering of certificates made by this
prospectus. The U.S. Department of Labor issued Prohibited Transaction Exemption
91-14 to a predecessor in interest to Lehman Brothers Inc. Subject to the
satisfaction of the conditions specified in that exemption, PTE 91-14, as
amended, including by PTE 97-34, generally exempts from the application of the
prohibited transaction provisions of ERISA and the Internal Revenue Code of
1986, various transactions relating to, among other things,
- the servicing and operation of some mortgage assets pools,
such as the types of mortgage asset pools that will be
included in our trusts, and
- the purchase, sale and holding of some certificates
evidencing interests in those pools that are underwritten by
Lehman Brothers Inc. or any person affiliated with Lehman
Brothers Inc., such as particular classes of the offered
certificates.
The related prospectus supplement will state whether PTE 91-14 is or
may be available with respect to any offered certificates underwritten by Lehman
Brothers Inc.
INSURANCE COMPANY GENERAL ACCOUNTS
The Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides relief from the fiduciary and prohibited
transaction provisions of ERISA and the Internal Revenue Code of 1986 for
transactions involving an insurance company general account. This exemption is
in addition to any exemption that may be available under prohibited transaction
class exemption 95-60 for the purchase and holding of offered certificates by an
insurance company general account.
Under Section 401(c) of ERISA, the U.S. Department of Labor issued a
final regulation on January 5, 2000, providing guidance for determining, in
cases where insurance policies supported by an insurer's general account are
issued to or for the benefit of an ERISA Plan on or before December 31, 1998,
which general account assets are ERISA Plan assets. That regulation generally
provides that, if the specified requirements are satisfied with respect to
insurance policies issued on or before December 31, 1998, the assets of an
insurance company general account will not be ERISA Plan assets.
Any assets of an insurance company general account which support
insurance policies issued to an ERISA Plan after December 31, 1998, or issued to
an ERISA Plan on or before December 31, 1998 for which the insurance company
does not comply with the requirements set forth in the final regulation under
Section 401(c) of ERISA, may be treated as ERISA Plan assets. In addition,
because Section 401(c) of ERISA and the regulation issued under Section 401(c)
of ERISA do not relate to insurance company separate accounts, separate account
assets are still treated as ERISA Plan assets, invested in the separate account.
If you are an insurance company are contemplating the investment of general
account assets in offered certificates, you should consult your legal counsel as
to the applicability of Section 401(c) of ERISA.
CONSULTATION WITH COUNSEL
CONSULTATION WITH COUNSEL
If you are a fiduciary for an ERISA Plan and you intend to purchase
offered certificates on behalf of or with assets of the ERISA Plan, you should:
- consider your general fiduciary obligations under ERISA, and
- consult with your legal counsel as to--
1. the potential applicability of ERISA and the
Internal Revenue Code of 1986 to that investment, and
2. the availability of any prohibited transaction
exemption in connection with that investment.
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TAX EXEMPT INVESTORS
An ERISA Plan that is exempt from federal income taxation under Section
501 of the Internal Revenue Code of 1986 will be subject to federal income
taxation to the extent that its income is "unrelated business taxable income"
within the meaning of Section 512 of the Internal Revenue Code of 1986. All
excess inclusions of a REMIC allocated to a REMIC residual certificate held by a
tax-exempt ERISA Plan will be considered unrelated business taxable income and
will be subject to federal income tax.
See "Federal Income Tax Consequences--REMICs--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions" in this prospectus.
LEGAL INVESTMENT
If and to the extent specified in the related prospectus supplement,
the offered certificates of any series may constitute mortgage related
securities for purposes of the Secondary Mortgage Market Enhancement Act of
1984. Mortgage related securities are legal investments for entities--
- that are created or existing under the laws of the United
States or any state, including the District of Columbia and
Puerto Rico, and
- whose authorized investments are subject to state regulations,
to the same extent that, under applicable law, obligations issued by or
guaranteed as to principal and interest by the United States or any of its
agencies or instrumentalities are legal investments for those entities.
Prior to December 31, 1996, classes of offered certificates would be
mortgage related securities for purposes of SMMEA only if they:
- were rated in one of the two highest rating categories by at
least one nationally recognized statistical rating
organization; and
- evidenced interests in a trust consisting of loans directly
secured by a first lien on a single parcel of real estate upon
which is located a dwelling or mixed residential and
commercial structure, which loans had been originated by the
types of originators specified in SMMEA.
Further, under SMMEA as originally enacted, if a state enacted
legislation on or before October 3,1991 that specifically limited the legal
investment authority of any entities referred to in the preceding paragraph with
respect to mortgage related securities under that definition,
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offered certificates would constitute legal investments for entities subject to
the legislation only to the extent provided in that legislation.
Effective December 31, 1996, the definition of "mortgage related
securities" was modified to include among the types of loans to which the
securities may relate, loans secured by "one or more parcels of real estate upon
which is located one or more commercial structures." In addition, the related
legislative history states that this expanded definition includes multifamily
loans secured by more than one parcel of real estate upon which is located more
than one structure. Until September 23, 2001, any state may enact legislation
limiting the extent to which mortgage related securities under this expanded
definition would constitute legal investments under that state's laws.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows:
- federal savings and loan associations and federal savings
banks may invest in, sell or otherwise deal with mortgage
related securities without limitation as to the percentage of
their assets represented by those securities; and
- federal credit unions may invest in mortgage related
securities and national banks may purchase mortgage related
securities for their own account without regard to the
limitations generally applicable to investment securities
prescribed in 12 U.S.C. 24 (Seventh),
subject in each case to the regulations that the applicable federal regulatory
authority may prescribe.
Effective December 31, 1996, the OCC amended 12 C.F.R. Part 1 to
authorize national banks to purchase and sell for their own account, without
limitation as to a percentage of the bank's capital and surplus, but subject
to compliance with general standards concerning "safety and soundness" and
retention of credit information in 12 C.F.R. Section 1.5, some Type IV
securities, which are defined in 12 C.F.R. Section 1.2(1) to include some
commercial mortgage-related securities and residential mortgage-related
securities. As defined, "commercial mortgage-related security" and
"residential mortgage-related security" mean, in relevant part, a mortgage
related security within the meaning of SMMEA, provided that, in the case of a
commercial mortgage-related security, it "represents ownership of a promissory
note or certificate of interest or participation that is directly secured by a
first lien on one or more parcels of real estate upon which one or more
commercial structures are located and that is fully secured by interests in a
pool of loans to numerous obligors." In the absence of any rule or
administrative interpretation by the OCC defining the term "numerous
obligors," we make no representation as to whether any class of offered
certificates will qualify as commercial mortgage-related securities, and thus
as Type IV securities, for investment by national banks.
The NCUA has adopted rules, codified at 12 C.F.R. Part 703, which
permit federal credit unions to invest in mortgage related securities under
limited circumstances, other than stripped mortgage related securities, residual
interests in mortgage related securities and commercial mortgage related
securities,
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unless the credit union has obtained written approval from the NCUA
to participate in the investment pilot program described in 12 C.F.R. Section
703.140.
The OTS has issued Thrift Bulletin 13a (December 1, 1998), "Management
of Interest Rate Risk, Investment Securities, and Derivatives Activities," which
thrift institutions subject to the jurisdiction of the OTS should consider
before investing in any of the offered certificates.
All depository institutions considering an investment in the offered
certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" of the Federal Financial
Institutions Examination Council, which has been adopted by the Board of
Governors of the Federal Reserve System, the FDIC, the OCC and the OTS effective
May 26, 1998, and by the NCUA effective October 1, 1998. That statement sets
forth general guidelines which depository institutions must follow in managing
risks, including market, credit, liquidity, operational (transaction), and legal
risks, applicable to all securities, including mortgage pass-through securities
and mortgage-derivative products used for investment purposes.
There may be other restrictions on your ability either to purchase one
or more classes of offered certificates of any series or to purchase offered
certificates representing more than a specified percentage of your assets. We
make no representations as to the proper characterization of any class of
offered certificates for legal investment or other purposes. Also, we make no
representations as to the ability of particular investors to purchase any class
of offered certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of offered
certificates. Accordingly, if your investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities, you should consult with your legal advisor in
determining whether and to what extent--
- the offered certificates of any class and series constitute
legal investments or are subject to investment, capital or
other restrictions; and
- if applicable, SMMEA has been overridden in your State.
USE OF PROCEEDS
Unless otherwise specified in the related prospectus supplement, the
net proceeds to be received from the sale of the offered certificates of any
series will be applied by us to the purchase of assets for the related trust or
will be used by us to cover expenses related to that purchase and the issuance
of those certificates. We expect to sell the offered certificates from time to
time, but the timing and amount of offerings of those certificates will depend
on a number of factors, including the volume of mortgage assets acquired by us,
prevailing interest rates, availability of funds and general market conditions.
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METHOD OF DISTRIBUTION
The certificates offered by this prospectus and the related prospectus
supplements will be offered in series through one or more of the methods
described in the next paragraph. The prospectus supplement prepared for the
offered certificates of each series will describe the method of offering being
utilized for those certificates and will state the net proceeds to us from the
sale of those certificates.
We intend that offered certificates will be offered through the
following methods from time to time. We further intend 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. The methods are as follows:
1. by negotiated firm commitment or best efforts underwriting and
public offering by one or more underwriters specified in the
related prospectus supplement;
2. by placements by us with institutional investors through
dealers; and
3. by direct placements by us with institutional investors.
In addition, if specified in the related prospectus supplement, the
offered certificates of a series may be offered in whole or in part to the
seller of the mortgage assets that would back those certificates. Furthermore,
the related trust assets for any series of offered certificates may include
other securities, the offering of which was registered under the registration
statement of which this prospectus is a part.
If underwriters are used in a sale of any offered certificates, other
than in connection with an underwriting on a best efforts basis, the offered
certificates will be acquired by the underwriters for their own account. These
certificates may be resold from time to time in one or more transactions,
including negotiated transactions, at fixed public offering prices or at varying
prices to be determined at the time of sale or at the time of commitment
therefor. The managing underwriter or underwriters with respect to the offer and
sale of offered certificates of a particular series will be described on the
cover of the prospectus supplement relating to the series and the members of the
underwriting syndicate, if any, will be named in the relevant prospectus
supplement.
Underwriters may receive compensation from us or from purchasers of the
offered certificates in the form of discounts, concessions or commissions.
Underwriters and dealers participating in the payment of the offered
certificates may be deemed to be underwriters in connection with those
certificates. In addition, any discounts or commissions received by them from us
and any profit on the resale of those offered certificates by them may be deemed
to be underwriting discounts and commissions under the Securities Act of 1933,
as amended.
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 various
conditions precedent,
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<PAGE>
- the underwriters will be obligated to purchase all the
certificates if any are purchased, other than in connection
with an underwriting on a best efforts basis, and
- in limited circumstances, we will indemnify the several
underwriters and the underwriters will indemnify us against
civil liabilities relating to disclosure in our registration
statement, this prospectus or any of the related prospectus
supplements, including liabilities under the Securities Act of
1933, as amended, or will contribute to payments required to
be made with respect to any liabilities.
The prospectus supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of the
offering and any agreements to be entered into between us and purchasers of
offered certificates of that series.
We anticipate that the offered certificates will be sold primarily to
institutional investors. Purchasers of offered certificates, including dealers,
may, depending on the facts and circumstances of the purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended, 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 reoffer or sale.
LEGAL MATTERS
Unless otherwise specified in the related prospectus supplement,
particular legal matters in connection with the certificates of each series,
including some federal income tax consequences, will be passed upon for us
by--
- Sidley & Austin;
- Cadwalader, Wickersham & Taft;
- Skadden, Arps, Slate, Meagher & Flom; or
- Thacher, Proffitt & Wood.
Financial Information
A new trust will be formed with respect to each series of offered
certificates. None of those trusts will engage in any business activities or
have any assets or obligations prior to the issuance of the related series of
offered certificates. Accordingly, no financial statements with respect to any
trust will be included in this prospectus or in the related prospectus
supplement. We have determined that our financial statements will not be
material to the offering of any offered certificates.
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<PAGE>
RATING
It is a condition to the issuance of any class of offered certificates
that, at the time of issuance, at least one nationally recognized statistical
rating organization has rated those certificates in one of its generic rating
categories which signifies investment grade. Typically, the four highest rating
categories, within which there may be sub-categories or gradations indicating
relative standing, signify investment grade.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders of all payments of interest and/or principal to which
they are entitled. These ratings address the structural, legal and
issuer-related aspects associated with the certificates, the nature of the
underlying mortgage assets and the credit quality of any third-party credit
enhancer. The rating(s) on a class of offered certificates will not represent
any assessment of--
- whether the price paid for those certificates is fair;
- whether those certificates are a suitable investment for any
particular investor;
- the tax attributes of those certificates or of the related
trust;
- the yield to maturity or, if they have principal balances, the
average life of those certificates;
- the likelihood or frequency of prepayments of principal on the
underlying mortgage loans;
- the degree to which the amount or frequency of prepayments on
the underlying mortgage loans might differ from those
originally anticipated;
- whether or to what extent the interest payable on those
certificates may be reduced in connection with interest
shortfalls resulting from the timing of voluntary prepayments;
- the likelihood that any amounts other than interest at the
related mortgage interest rates and principal will be received
with respect to the underlying mortgage loans; or
- if those certificates provide solely or primarily for payments
of interest, whether the holders, despite receiving all
payments of interest to which they are entitled, would
ultimately recover their initial investments in those
certificates.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
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<PAGE>
GLOSSARY
The following capitalized terms will have the respective meanings
assigned to them in this "Glossary" section whenever they are used in this
prospectus.
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"CERCLA" means the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"COMMITTEE REPORT" means the Conference Committee Report accompanying
the Tax Reform Act of 1986.
"CPR" means an assumed constant rate of prepayment each month, which
is expressed on a per annum basis, relative to the then outstanding principal
balance of a pool of mortgage loans for the life of those loans.
"DISQUALIFIED ORGANIZATION" means:
- the United States,
- any State or political subdivision of the United States,
- any foreign government,
- any international organization,
- any agency or instrumentality of the foregoing, except for
instrumentalities described in Section 168(h)(2)(D) of the
Internal Revenue Code or the Freddie Mac,
- any organization, other than a cooperative described in
Section 521 of the Internal Revenue Code, that is exempt from
federal income tax, except if it is subject to the tax imposed
by Section 511 of the Internal Revenue Code, or
- any organization described in Section 1381(a)(2)(C) of the
Internal Revenue Code.
"ECS" means Euroclear Clearance System, S.C., a Belgian cooperative
corporation.
"ELECTING LARGE PARTNERSHIP" means any partnership having more than 100
members during the preceding tax year which elects to apply simplified reporting
provisions under the Internal Revenue Code of 1986, except for some service
partnerships and commodity pools.
"ERISA PLAN" means any employee benefit plan, or other retirement plan,
arrangement or account, that is subject to the fiduciary responsibility
provisions of the Employee Retirement Income Security Act of 1974, as amended,
and Section 4975 of the Internal Revenue Code of 1986.
"EUROCLEAR OPERATOR" means Morgan Guaranty Trust Company of New
York, Brussels, Belgium office, as operator of the Euroclear System.
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<PAGE>
"EUROCLEAR TERMS AND CONDITIONS" means the Terms and Conditions
Governing Use of Euroclear and the related Operating Procedures of the Euroclear
System and, to the extent that it applies to the operation of the Euroclear
System, Belgian law.
"FANNIE MAE" means the Federal National Mortgage Association.
"FARMER MAC" means the Federal Agricultural Mortgage Corporation.
"FASIT" means a financial asset securitization trust, within the
meaning of, and formed in accordance with, the Small Business Job Protection
Act of 1996 and Sections 860I through 860L of the Internal Revenue Code of
1986.
"FDIC" means the Federal Deposit Insurance Corporation.
"FINANCIAL INTERMEDIARY" means a brokerage firm, bank, thrift
institution or other financial intermediary that maintains an account of a
beneficial owner of securities.
"FREDDIE MAC" means the Federal Home Loan Mortgage Association.
"GINNIE MAE" means the Government National Mortgage Association.
"GOVERNING DOCUMENT" means the pooling and servicing agreement or other
similar agreement or collection of agreements, which governs the issuance of a
series of offered certificates.
"IRS" means the Internal Revenue Service.
"LENDER LIABILITY ACT" means the Asset Conservation Lender Liability
and Deposit Insurance Act of 1996, as amended.
"NET INCOME FROM FORECLOSURE PROPERTY" means income from foreclosure
property other than qualifying rents and other qualifying income for a REIT.
"NCUA" means the National Credit Union Administration.
"OCC" means the Office of the Comptroller of the Currency.
"OTS" means the Office of Thrift Supervision.
"PARTY IN INTEREST" means any person that is a "party in interest"
within the meaning of ERISA or a "disqualified person" within the meaning of the
Internal Revenue Code of 1986.
"PASS-THROUGH ENTITY" means any:
- regulated investment company,
- real estate investment trust,
- trust,
- partnership, or
- certain other entities described in Section 860E(e)(6) of the
Internal Revenue Code.
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<PAGE>
"PLAN ASSET REGULATIONS" means the regulations of the U.S. Department
of Labor promulgated under the Employee Retirement Income Security Act of 1974,
as amended.
"REIT" means a real estate investment trust within the meaning of
Section 856(a) of the Internal Revenue Code of 1986.
"RELIEF ACT" means the Soldiers' and Sailors' Relief Act of 1940, as
amended.
"REMIC" means a real estate mortgage investment conduit, within the
meaning of, and formed in accordance with, the Tax Reform Act of 1986 and
Sections 860A through 860G of the Internal Revenue Code of 1986.
"SEC" means the Securities and Exchange Commission.
"SPA" means standard prepayment assumption.
"UCC" means, for any jurisdiction, the Uniform Commercial Code as in
effect in that jurisdiction.
"U.S. PERSON" means:
- a citizen or resident of the United States;
- a corporation, partnership or other entity created or
organized in, or under the laws of, the United States or any
political subdivision of the United States;
- an estate whose income from sources without the United States
is includible in gross income for United States federal income
tax purposes regardless of its connection with the conduct of
a trade or business within the United States; or
- a trust as to which--
1. a court in the United States is able to exercise
primary supervision over the administration of the
trust, and
2. one or more United States persons have the authority
to control all substantial decisions of the trust.
In addition, to the extent provided in the Treasury Regulations, a
trust will be a U.S. Person if it was in existence on August 20, 1996 and it
elected to be treated as a U.S. Person.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (ITEM 14 OF FORM S-3).
The expenses expected to be incurred in connection with the issuance and
distribution of the securities being registered, other than underwriting
compensation, are as set forth below.
<TABLE>
<S> <C>
Filing Fee for Registration Statement $1,056,000.00
Legal Fees and Expenses 1,400,000.00*
Accounting Fees and Expenses 460,000.00*
Trustee's Fees and Expenses
(including counsel fees) 135,000.00*
Blue Sky Fees and Expenses 32,000.00*
Printing and Engraving Fees 600,000.00*
Rating Agency Fees 6,000,000.00*
Miscellaneous 460,000.00*
Total $10,143,000.00
--------------
</TABLE>
* Based on four offerings.
INDEMNIFICATION OF DIRECTORS AND OFFICERS (ITEM 15 OF FORM S-3)
The governing document(s) for each series of the securities being
registered will provide that no director, officer, employee or agent of the
Registrant is liable to the related trust or the related security holders,
except for such person's own willful misfeasance, bad faith or gross negligence
in the performance of duties or reckless disregard of obligations and duties.
Such governing document(s) will further provide that, with the exceptions stated
above, a director, officer, employee or agent of the Registrant is entitled to
be indemnified against any loss, liability or expense incurred in connection
with legal actions relating to such document(s) and the related securities.
Any purchase agreement pursuant to which the Registrant acquires mortgage
assets for purposes of backing a series of the securities being registered, may
provide under certain circumstances that each director of the Registrant, each
officer of the Registrant that signed this Registration Statement or any
amendment hereof, and certain controlling persons of the Registrant, are
entitled to be indemnified by the seller of those mortgage assets or an
affiliate against certain liabilities, including liabilities under the
Securities Act of 1933, relating to those mortgage assets.
Any underwriters who execute an underwriting agreement with respect to
any of the securities being registered will agree to indemnify the Registrant's
directors, its officers who signed this
II-1
<PAGE>
Registration Statement and its controlling persons against certain liabilities
which might arise under the Securities Act of 1933 or the Securities Exchange
Act of 1934 or other laws to the extent those liabilities arise in connection
with the issuance of securities under this Registration Statement.
Subsection (a) of Section 145 of the General Corporation Law of Delaware
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that the person is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by the person in
connection with the defense or settlement of such action or suit if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification may be made with respect to any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine, upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the court shall deem proper.
Section 145 further provides that to the extent a present or former
director or officer of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) or in the defense of any claim, issue or matter therein,
such person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith; that
indemnification or advancement of expenses provided for by Section 145 shall not
be deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled; and empowers the corporation to
purchase and maintain insurance on behalf of a director, officer, employee or
agent of the corporation against any liability asserted against such person or
incurred by such person in any such capacity or arising out of such person's
status as such whether or not the corporation would have the power to indemnify
such person against such liabilities under Section 145.
The By-Laws of the Registrant provide, in effect, that to the extent and
under the circumstances permitted by subsections (a) and (b) of Section 145 of
the General Corporation Law of the State of Delaware, the Registrant (i) shall
indemnify and hold harmless each person who was or is a party or is threatened
to be made a party to any action, suit or proceeding described in subsections
(a) and (b) by reason of the fact that he is or was a director or officer, or
his testator or intestate is or was a director or officer of the Registrant,
against expenses, judgments, fines and amounts paid in settlement, and (ii)
shall indemnify and hold harmless each person who was or is a party or is
threatened to be made a party to any such action, suit or proceeding if such
person is or was serving at the request of the
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<PAGE>
Registrant as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise.
EXHIBITS (ITEM 16 OF FORM S-3)
<TABLE>
<CAPTION>
EXHIBITS
<S> <C> <C>
1.1 -- Form of Underwriting Agreement.*
4.1 -- Form of Pooling and Servicing Agreement.*
4.2 -- Form of Trust Indenture.*
5.1 -- Opinion of Sidley & Austin with respect to legality.**
5.2 -- Opinion of Cadwalader, Wickersham & Taft with respect to legality.**
5.3 -- Opinion of Skadden, Arps, Slate, Meagher & Flom with respect to legality.**
5.4 -- Opinion of Thacher, Proffitt & Wood with respect to legality.**
8.1 -- Opinion of Sidley & Austin with respect to certain tax matters.**
8.2 -- Opinion of Cadwalader, Wickersham & Taft with respect to certain tax matters (included
as part of Exhibit 5.2).**
8.3 -- Opinion of Skadden, Arps, Slate, Meagher & Flom with respect to certain tax matters (included
as part of Exhibit 5.3).**
8.4 -- Opinion of Thacher, Proffitt & Wood with respect to certain tax matters.**
23.1 -- Consent of Sidley & Austin (included as part of Exhibit 5.1 and Exhibit 8.1).**
23.2 -- Consent of Cadwalader, Wickersham & Taft (included as part of Exhibit 5.2).**
23.3 -- Consent of Skadden, Arps, Slate, Meagher & Flom (included as part of Exhibit 5.3).**
23.4 -- Consent of Thacher, Proffitt & Wood (included as part of Exhibit 5.4 and Exhibit
8.4).**
24.1 -- Power of Attorney (included in signature page to this Registration Statement).**
25.1 -- Statement of Eligibility of Trustee.**
99.1 -- Form of Servicing and Administration Agreement.*
99.2 -- Form of Deposit Trust Agreement.*
</TABLE>
-------------------------
* Incorporated by reference to the Registration Statement on Form S-3 (File
No. 333-49129) and to the Amendment No. 2 to the Registration Statement on
Form S-3 (File No. 33-50210) previously filed by the Registrant.
** Previously filed in connection with the Registration Statement on Form S-3
filed on February 24, 2000.
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<PAGE>
UNDERTAKINGS (ITEM 17 OF FORM S-3)
A. UNDERTAKINGS PURSUANT TO RULE 415
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, (ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement, and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in this
Registration Statement or any material change to such information in this
Registration Statement; provided, however, that paragraphs (1)(i) and (1)(ii)
do not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with or
furnished to the Securities and Exchange Commission by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
B. UNDERTAKINGS IN RESPECT OF FILINGS INCORPORATING SUBSEQUENT EXCHANGE
ACT DOCUMENTS BY REFERENCE
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
C. UNDERTAKINGS IN RESPECT OF EQUITY OFFERINGS OF NONREPORTING REGISTRANTS
The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
D. UNDERTAKINGS IN RESPECT OF QUALIFICATION OF TRUST INDENTURES IN
RELIANCE ON SECTION 305(b)(2) OF THE TRUST INDENTURE ACT OF 1939
The undersigned Registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939 in
accordance with the rules and regulations prescribed by the Securities and
Exchange Commission under Section 305(b)(2) of the Trust Indenture Act of
1939.
E. UNDERTAKINGS IN RESPECT OF REQUESTS FOR ACCELERATION OF EFFECTIVE
DATE PURSUANT TO RULE 461
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is,
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<PAGE>
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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<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, reasonably believes that the
security rating requirement contained in Transaction Requirement B.5. of Form
S-3 will be met by the time of the sale of the securities registered hereunder
and has duly caused this Amendment No. 2 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York on the 1 day of June 2000.
STRUCTURED ASSET SECURITIES CORPORATION
By: *
--------------------------------------
Name: Mark L. Zusy
Title: Chairman
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE DATE TITLE
--------- ---- -----
<S> <C> <C>
* JUNE 1, 2000 Chairman and Director
--------------------------------------------------- -------------- (principal executive officer)
Mark L. Zusy
* JUNE 1, 2000 Director
--------------------------------------------------- --------------
Neal Leonard
* JUNE 1, 2000 Director
--------------------------------------------------- --------------
James Sullivan
* JUNE 1, 2000 Treasurer
--------------------------------------------------- -------------- (principal financial officer)
Daniel O. Minerva
* JUNE 1, 2000 Controller
--------------------------------------------------- -------------- (principal accounting officer)
David Goldfarb
</TABLE>
-------------------------
* Michael J. Mazzei, by signing his name hereto, does sign this document on
behalf of each of the persons identified above for whom he is
attorney-in-fact pursuant to a power of attorney duly executed by such
person and previously filed with the Securities and Exchange Commission.
/s/ Michael J. Mazzei
-------------------------
Michael J. Mazzei
Attorney-in-Fact
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<PAGE>
EXHIBIT INDEX
Page Number
<TABLE>
<S> <C> <C>
1.1 -- Form of Underwriting Agreement.*
4.1 -- Form of Pooling and Servicing Agreement.*
4.2 -- Form of Trust Indenture.*
5.1 -- Opinion of Sidley & Austin with respect to legality.**
5.2 -- Opinion of Cadwalader, Wickersham & Taft with respect to legality.**
5.3 -- Opinion of Skadden, Arps, Slate, Meagher & Flom with respect to legality.**
5.4 -- Opinion of Thacher, Proffitt & Wood with respect to legality.**
8.1 -- Opinion of Sidley & Austin with respect to certain tax matters.**
8.2 -- Opinion of Cadwalader, Wickersham & Taft with respect to certain tax matters (included as part
of Exhibit 5.2).**
8.3 -- Opinion of Skadden, Arps, Slate, Meagher & Flom with respect to certain tax matters (included
as part of Exhibit 5.3).**
8.4 -- Opinion of Thacher, Proffitt & Wood with respect to certain tax matters.**
23.1 -- Consent of Sidley & Austin (included as part of Exhibit 5.1 and Exhibit 8.2).**
23.2 -- Consent of Cadwalader, Wickersham & Taft (included as part of Exhibit 5.2).**
23.3 -- Consent of Skadden, Arps, Slate, Meagher & Flom (included as part of Exhibit 5.3).**
23.4 -- Consent of Thacher, Proffitt & Wood (included as part of Exhibit 5.4 and Exhibit 8.4).**
24.1 -- Power of Attorney (included in signature page to this Registration Statement).**
25.1 -- Statement of Eligibility of Trustee.**
99.1 -- Form of Servicing and Administration Agreement.*
99.2 -- Form of Deposit Trust Agreement.*
</TABLE>
-------------------------
* Incorporated by reference to the Registration Statement on Form S-3 (File
No. 333-49129) and to the Amendment No. 2 to the Registration Statement on
Form S-3 (File No. 33-50210) previously filed by the Registrant.
** Previously filed in connection with the Registration Statement on Form S-3
filed on February 24, 2000.
